Negotiating a retail or commercial lease

Business Advice & Assistance Starting a Business

If you are looking to rent or lease a commercial property or shop do you know you can negotiate with the landlord?  The Polaris Centre often sees people looking to start or move their business from home and want to have a shopfront or office.  If you have done your homework and are ready to take the next big step in committing to a lease this article provides some tips to negotiate the lease.  If you are still at preliminary stage, please check out our “Important tips before signing a retail or commercial lease” article.  Should you just accept the proposal from the landlord or agent?  The saying goes that everything in business is negotiable, and this is particularly true when it comes to a commercial property lease.

In fact, regardless of whether you’re a small business or a larger employer it’s vital to remember that lease terms are set by the landlord and usually in their favour, making it vital to negotiate terms that are suitable for both parties rather than simply accepting the first offer.  Most landlords are open to negotiation, especially if it ensures a high-quality tenant that will be in their property for longer. 

While commercial landlords and their leasing agents may not like it, in many circumstances leases are altered to benefit the tenant.  This process usually begins with the tenant submitting a counter offer or negotiating directly with the agent. 

Commercial leases are very different to a home rental agreement.  Firstly, they tend to be longer and have many additional clauses and obligations including who is responsible for the property maintenance and fit-out.  (The Polaris Centre lease is 55 pages long).  This makes them more complex but also provides additional areas in the contract where a tenant can set the terms.

Some of the things within a commercial property lease that may be up for negotiation include:

Length of agreement

It’s always a good idea to consider the lease term and what suits your business when negotiating a commercial lease.  Landlords generally don’t like going below five years”, so a short-term lease could be difficult to negotiate, but not impossible.  Landlords prefer longer leases as they provide security, so the more years you are willing to commit to, the more leverage you may have when negotiating other parts of the deal.  

Price

This is the base figure calculated on a per-square-metre basis that covers the building and maintenance costs, tax, and other outlays.  However, landlords may be willing to offer a discount in the post-COVID-19 market, with plenty of landlords looking for tenants. Before negotiations start it’s best to check that the rent is at the market rate, check on the premises’ history and check whether the location is in high demand.  Armed with this information you will be in a stronger bargaining position.

Incentives

Some landlords may offer incentives rather than a reduction in rent.  Usually this is based on a margin calculated into the base rent and can include offers such as a rent-free period, a landlord contribution to fit-out, or in some cases landlords may even be willing to help cover the costs of the end of your current lease, in order to lock in a contract.

Fit-out

Prior to commencing a new commercial lease, a tenant will typically need to make the premises suitable for use.  So before signing an agreement it’s worth seeing if the landlord is offering any contribution towards the fit-out.  If so, the contribution will usually be paid after the work is done, rather than being reimbursed in cash.  Often it can be factored into the rent throughout the length of the lease, or provided through a rent-free period.  Another common scenario is where the tenant is not charged rent for a specified period time while the fit-out is being done.

Outgoings

In a commercial lease, tenants will often be required to pay outgoings.  This may include water bills, council rates, electricity, insurance, cleaning, management fees and pest control, which can all add up to be considerable.  These leasing costs can be negotiated to be transferred to the landlord as part of the lease agreement.

Steps to negotiating a commercial lease

If you’re considering leasing a commercial property and want to negotiate different terms on the lease, here are some simple steps you can follow to give yourself the best chance of securing a better deal.

  • Analyse the market
  • Start early
  • Consider getting help
  • Negotiate the deal
  • Get an inspection
  • Get legal advice

Polaris business advisors are always happy to share their experience in lease negotiations that they have been involved.

There are also great tips and resources available from the South Australian Small Business Commissioner.  It is also a legal requirement that lessees are provided with a copy of the Retail and Commercial Leasing Guide.   

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