How to Negotiate a Commercial Lease

Negotiating a commercial lease is a critical step when buying or selling a business. The terms of your lease can significantly impact your business’s financial health and long-term success. A well-negotiated lease ensures your company has a stable location, reasonable expenses, and flexibility for future growth or transitions. This article will walk you through the key factors to consider when negotiating a commercial lease and provide practical tips to help you secure the best possible terms.  Regarding the sale or transition of a business, the buyer will need to negotiate either an assignment or novation of the lease or a new lease in its entirety. SBA Lenders will require a lease in place for the term of the loan they are providing financing for. This is one of the critical milestones for completing a sale.

Paul Long, an SBA and Business acquisition lending expert at Gesa Credit Union, and Seth Rudin, a Senior Mergers and Acquisitions Broker with IBA, vet the considerations for Seller Financing.

The Importance of Lease Negotiations

A commercial lease is more than just a rental agreement—it’s a binding contract that dictates your rights and responsibilities as a tenant. Whether taking over an existing lease in a business acquisition or negotiating a new lease for your venture, you must ensure the terms are fair and align with your business goals. Key elements to focus on include:

• Lease length: The duration of the lease should provide enough security without overly restricting your flexibility.
• Renewal options: Being able to renew your lease under favorable conditions can be crucial for business continuity.
• Rent and escalations: Understand how rent will increase over time to avoid unexpected financial strain.
• Assignment and subletting rights: If you plan to sell your business, you may need the ability to transfer the lease to a new owner.
• Securing Financing: Credit union/banks/SBA loans will help the Buyer secure a concurrent lease term to the credit union/banknote the credit union/bank is providing. It is essential that the Buyer is successful in this negotiation.

Understanding the Different Types of Leases

Commercial leases come in various structures, each with its own benefits and drawbacks. Understanding these lease types will help you determine which one is best suited for your business.

Triple Net Lease (NNN): With a triple net lease, the tenant is responsible for paying rent plus additional costs such as property taxes, insurance, and maintenance expenses. This lease type is common in retail spaces and can provide lower base rent but comes with added financial responsibility.

 Gross Lease (Full-Service Lease): A gross lease includes all property-related expenses within the rent, meaning the landlord covers taxes, insurance, and maintenance. While this lease offers predictable costs, the rent is often higher than in a triple-net lease.

 Percentage Lease: This type of lease is common in shopping malls or retail spaces. The tenant pays a base rent plus a percentage of their sales revenue. While this can reduce upfront costs, it also means paying more as the business revenue grows.

Key Lease Terms to Negotiate

One of the most important aspects of a lease is its duration. A long-term lease can provide stability but may lock you into a contract that becomes unfavorable over time. Look for renewal options that allow you to extend your lease under pre-agreed terms. Make sure you carefully negotiate each of the below 5 terms.

1. Rent Amount and Increases: Ensure you understand how your rent is calculated and whether there are built-in rent increases (escalation clauses). Some landlords may tie rent hikes to inflation, while others use a fixed percentage increase. Be sure to negotiate for a cap on these rises to keep costs manageable.

2. Landlord’s Consent to Business Sale: If you’re purchasing a business with an existing lease, your lender will require the landlord’s consent to transfer the lease or get the credit union/banks collateral to secure financing. This process can be time-consuming, so starting discussions with the landlord early is crucial to avoid delays in closing.

3. Common Area Maintenance (CAM) Fees: If you’re responsible for paying a share of the building’s maintenance costs (Utilities, Taxes, Repairs, Landscaping and other property expenses), ensure these expenses are clearly outlined. Negotiate for a cap on annual increases to avoid unexpected financial burdens.

4. Tenant Improvements and Build-Outs: If your business requires modifications to the space, clarify who will cover these costs. Some landlords may offer tenant improvement allowances to help with renovations.

5. Exit Clauses and Termination Rights: Negotiate terms that allow for an early exit in case your business circumstances change. Look for options such as a buyout clause or subleasing rights.

Additional Tips for a Successful Negotiation

Hire a Professional Broker: A commercial real estate broker understands market trends and can help you secure the best possible lease terms. They can also navigate negotiations and ensure you don’t overlook critical details.

Conduct Thorough Research: Before entering negotiations, research the market rates and lease structures for similar properties in your area. This knowledge will give you leverage in discussions with the landlord.

Be Prepared to Negotiate: Landlords are an important player in your acquisition of a business. You must be prepared to provide them with an executive summary of yourself, a business plan, and detailed financials. Some sophisticated landlords will ask you to explain why they should allow you to lease their property.  In addition, there may be cases where you should expect negotiations, so don’t always accept the first offer. When appropriate and without compromising your business acquisition, you might be able to push for better terms on rent, renewal options, and additional costs. The more leverage you have—such as multiple location options—the stronger your negotiating position will be.

Negotiating a commercial lease can be complex, but taking the time to understand the different lease types and key terms can save you money and provide long-term stability for your business. By hiring a professional, conducting thorough research, and being prepared to negotiate, you can secure a lease that supports your business’s success.

Whether buying or selling a business, a well-structured lease can be a valuable asset ensuring smooth operations and financial security.

For any SBA or Business Acquisition lending questions, contact Paul Long, AVP of SBA Lending at Gesa Credit Union, at plong@gesa.com or 253-300-5414.

For questions related to selling a business, you can reach Seth Rudin, Senior Mergers and Acquisitions Broker of IBA, at seth@ibainc.com or 425-454-3052.