How to Successfully Negotiate a Commercial Lease [8 Tips]
When leasing a commercial space, the ball is in your court.
Just because a landlord sets their terms and rules, that does not mean the agreement is set in stone. In reality, many landlords expect a negotiation and will be open to discussing reasonable changes to an agreement. So where do you start? What’s on or off the table for discussion? Below we’ll share the most important points you should negotiate in your lease agreement along with tips to guide you through every step of negotiations.
Remember that if you don’t speak up, the only one that’s losing out is you. Find how to successfully negotiate your commercial lease below.
What You Can (& Should) Negotiate in Your Commercial Lease
Before the discussions begin, what should you talk about? Below are a few key points you should research and address before starting talks with your landlord. This list is by no means exhaustive and as a potential tenant, you should consider other factors that could be mutually beneficial to both you and the landlord.
Landlords want you to believe that the price is the price. And in a competitive market, very few property owners (if any) will be willing to modify their initial offer. Even still, it doesn’t hurt to see where a landlord stands within a price range.
For most commercial spaces in Australia, rent is calculated per square metre. The price per square metre is totaled into an annual rental fee which covers maintenance costs, building use, and any profit paid out to the landlord.
Landlords arrive at this calculation via a variety of factors (e.g. local competition, building age, travel convenience, move-in readiness, etc.). They also consider their own profitability. Has the location been vacant for some time? If the owner is still looking for a tenant they may be more willing to negotiate on price. And if they aren’t willing to do a reduction for the complete term, see if they would be open to a reduced rent period at the start or end of the lease.
Term length is also not completely set in stone for a commercial lease. Do you need the space for a few years or are you looking for a long-term solution? Or maybe you don’t want to lock into something longer than 5 years?
Landlords want security and steady income, preferring tenants interested in leases of 5 years or more. Not interested in a lease this long? Some landlords may be willing to negotiate a shorter lease term, but they may charge you in other ways (e.g. higher monthly rent). In reverse, if you pitch a long-term lease, property owners may be more open to negotiating other parts of the agreement.
Unless the landlord has completed a spec fitout, you’ll likely need to do a bit of work to make the space work-ready for your team. Before signing off on anything, now is the perfect opportunity to learn if your landlord will contribute to any fitout work done on the property.
If your landlord is open to subsidising the cost of your fitout, they will usually reimburse you in one of these ways:
- Payment after works are completed
- Factoring the cost into the rent, reducing the overall amount of rent paid during the term
- Providing a predetermined rent-free period
- Not charging rent until the fitout is complete
When moving into a new space, landlords will transfer some or all outgoings over to the tenant. As a business owner, you could be responsible for water, electricity, owners corporation fees and more.
Yet as with most points in your lease agreement, these costs can be negotiated. This is especially true if you can show that certain outgoings are unreasonable to pass on to the tenant.
Office Strip Out & Make Good Agreements
Most landlords write a ‘make good’ clause into your lease agreement. These terms generally state that the tenancy must be returned to its original state before the end of the term. If the commercial space was a vacant shell, you may need to do a complete office strip out.
If you modify a preexisting fitout on the property, you may be required to complete a refurbishment to return the property to its original look. In either case, you should negotiate the make-good arrangement. You might be able to waive some or all parts of this clause if your existing fitout can be repurposed as a spec fitout when the property goes back on the market.
Any Other Incentives
Some property owners won’t budge on price or any other terms. But they might be more than willing to offer ongoing incentives to a potential tenant.
Some landlords will offer a rent-free period to get a tenant in the door. Some will even offer financial help in ending your current lease, especially if you intend to lock into a long-term lease. It never hurts to ask for additional arrangements especially when the landlord is under pressure to secure a tenant.
8 Tips For Negotiating Your Commercial Lease
1. Start Early
Any lease, from 6 months all the way to 10 years, is a big decision. And once you’re locked into a contract, no landlord is obligated to modify the terms in your favour should your situation change. If you’re looking to move to a different space, it's best to start your search early. Commercial real estate is a fluctuating market. If you’re able to lock in favourable terms before the economic landscape changes, it could save you thousands on rent.
Likewise, if you want to renew your lease, it is best to start the conversation early. Keeping a tenant is cheaper than finding a new one. Landlords will prefer to keep someone around especially if the relationship has been easygoing.
2. Research the Market
Either before or after you break the ice with a landlord, take the time to learn what’s going on in the market. Are there many tenants searching for a commercial space? If so, landlords will probably not move on price. Likewise, if there are many vacant spaces and very few renters, landlords will likely be open to negotiating prices.
Keep track of a few different properties in the area. Are prices different? How about incentives? Use these points as leverage in your negotiations.
3. Find Out Your Landlord’s Renewal Profits
When a lease ends and the tenant doesn’t renew, the landlord is losing money daily. First, they need to spend a sizable chunk of money getting the property listed and advertised online. Even if they find a tenant to move in immediately, there may be a rent-free grace period while the fitout is being constructed. During the entire process, landlords could lose out on income from anywhere from a few months to up to a year in a worst-case scenario.
In your research stage, put a potential dollar amount to this loss of income. This amount is your landlord’s renewal profits; the money they make by keeping you as a tenant. Use this amount as a point of leverage to convince a landlord to keep their prices low.
4. Assess Your Business Needs
Think long term. What does your business need to be efficient and productive? What amenities are needed for employee wellbeing? Will these necessities change over the next 3 - 5 years?
Figure out what your team needs to do its best work. It could be technology, machinery, or a particular office configuration. Share all of these ideas in your negotiation. In some cases, a landlord might be open to fronting some of the costs to make this happen, especially if they want to get your business into the space quickly.
5. Consider Getting External Help/Representation
Negotiating is not for everyone. And as a business owner, you don’t want negotiations to get in the way of you running your business. Given the complexity of commercial lease agreements, some tenants seek out external help.
A tenant advisor can help you prepare for your negotiations. They are in the markets every day, so they’ll know how you can most effectively leverage all points in your agreement.
You can also leave the actual stages of negotiations in the hands of a professional advocate or lawyer. Hiring a professional who knows the law and current market conditions to negotiate the best agreement possible on your behalf.
Now the real part: negotiations. Whether you do everything on your own or seek out professional representation, you’ve taken a step to advocate for yourself. This one step will go a long way in ensuring you reach a deal that’s in your best interest.
Negotiations can be quick, or go on for months for more complex deals. Keep in mind that if the market is hot, there is a possibility that others may be vying for the same space. If you're set on this location, you may have to compromise until you reach a conclusion that’s in your best interest, and the landlord’s.
7. Perform a Final Inspection
As with renting a home or apartment a detailed inspection is just as important in a commercial property. While you should lead with trust or integrity, there’s always the chance that a landlord could selectively choose not to reveal certain information about the property.
This final inspection can be performed on your own, or you can hire an official inspector for peace of mind. While it’s ideal to find zero faults or damage, any that you find can be used as leverage in the negotiation. If the space is in very poor condition, landlords will be more willing to front some of your fitout costs;
8. Get Final Legal Advice Before Signing a Lease Agreement
Last but not least, get legal advice before signing your name on the dotted line.
Yes, a property lawyer may be expensive, but what’s worse? Finding any red flags early or finding them 1 year into your 10-year contract? Commercial real estate is more complex than domestic renting. Make sure you cover yourself with the proper legal support.
Negotiate Your Commercial Lease Successfully
Commercial lease agreements are complicated. At the end of the day, landlords are business owners just like you. They will put their interest first, so you must do the same for yourself. Somewhere in the middle is a solution that works for both parties.
At Canopy Fitouts we create spaces that inspire meaningful work. If you're in the process of moving into a new commercial space or want to renovate an existing one, we can help. We have years of fitout experience across multiple industries and can work with you to create a design that is fresh, welcoming, and functional.
If you have any specific questions or are ready to get started on your office fitout, speak with our knowledgeable team today. Initial consultations are free and fully transparent.