What You Need to Consider When Negotiating a Commercial Lease Agreement
3 min read.
One of the primary considerations for commercial real estate clients is undoubtedly the lease amount and conditions. As a commercial real estate agent, your role is to guide your clients through negotiating a commercial lease agreement.
By following the steps below, you can effectively assist your clients in securing favourable lease terms:
1. Evaluate the Business Needs: Clearly define the business requirements, including the current and expected future space of the company, location, amenities, and lease term. As a new business, ask your client to consider a short-term lease, such as two to three years, by paying more on the rent, as it will be easier to walk away if needed. This can form the basis of the negotiation strategy.
2. Conduct Market Research: Gather information on current market conditions, rental rates, and lease terms in the target area. This knowledge enables your client to evaluate the landlord's proposals effectively and negotiate for a lower rent, strengthening your client’s negotiation position.
3. Engage Legal Expertise: It is crucial to involve a commercial real estate lawyer who can review the lease agreement and provide valuable legal advice. Their expertise ensures a thorough understanding of the terms and can help identify potential risks or mistakes.
4. Draft a Letter of Intent (LOI): You must draft an LOI that outlines the fundamental terms, such as rent, lease duration, renewal options, and specific requirements or concessions. The LOI serves as a starting point for negotiations and sets the tone for further discussions.
5. Focus on Key Lease Terms: Prioritize negotiations on critical terms that align with your client’s business needs. These may include rent, lease duration, expansion options, maintenance responsibilities, common area costs, and desired concessions. Be prepared to find a middle ground and identify negotiable items.
6. Seek Tenant Inducements: Assist your client in asking for tenant inducements, such as rent abatement, rent-free periods for renovations, or flexible rent increases tied to inflation or revenue performance. Use market research and budget constraints to negotiate favourable terms.
7. Understand Maintenance and Operating costs: It is important to clarify responsibilities for maintenance, repairs, utilities, property taxes, insurance, and other operating expenses. Negotiate a fair allocation of costs, ensuring clarity and reasonableness in the lease agreement.
8. Consider Lease Improvements: If your client requires specific modifications or improvements, engage in discussions with the landlord regarding cost-sharing, scope of work, and associated timelines. Advocate for your client's needs while maintaining a collaborative approach.
9. Review Termination and Assignment Clauses: Carefully evaluate lease termination provisions, early termination options, subletting, and assignment clauses. Consider your client's business needs and negotiate terms that provide flexibility or align with their long-term goals.
10. Assist in Providing Professional Guidance: Collaborate closely with the commercial real estate lawyer and other relevant professionals to provide insights into any legal implications and protect your client's interests throughout the negotiation process.
11. Document Agreements: Once an agreement is reached on all lease terms, document everything in a written lease agreement. Your client should review it carefully with a lawyer to ensure it accurately reflects the negotiated terms.
By following these steps and utilizing your expertise as a commercial real estate agent, you can assist your clients in negotiating a commercial lease that aligns with their business goals and secures favourable terms.
References
Bloomenthal, A. (2023, January 17). How to use a letter of intent (LOI) to make a deal. Investopedia. https://www.investopedia.com/terms/l/letterofintent.asp
12 tips for negotiating a commercial lease. BDC.ca. (2023, April 6). https://www.bdc.ca/en/articles-tools/money-finance/buy-lease-commercial-real-estate/how-to-negotiate-commercial-lease-effectively
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