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Copyright © 2005
Tobacco Outlet Business
Updated September 24, 2005
OPERATIONS: Store Leases – September/October 2002
Leasing 101
You've found the right spot. Now it's time to work out the right lease.
You've
searched far and wide, and finally you've found it-the perfect place to open an
outlet. It's only natural to want to lock up the deal right away. After all, you
may have looked at-and rejected-dozens of locations. But while you don't want to
lose the space you've worked so hard to find, you also can't afford to rush into
signing on the dotted line.
Sure, location is important, but so are terms. After all, rent is second only to inventory as the largest business expense an outlet store will have. So it's essential to get what you need in a commercial lease-and to know exactly what you're getting.
Surprisingly, many business owners fail to read through all of the provisions of a lease, an oversight that can lead to unwelcome surprises down the road. Take, for example, the fledgling outlet owner who put nearly $150,000 into making renovations and improvements, but hadn't noticed that his lease lacked an "option to renew." When his lease ended, his landlord demanded a hefty increase and he had to pay or face finding a new location-and likely putting a similar sum into outfitting the new spot and telling his customers where to find him.
Ideally, you should also have an attorney look over your lease-particularly if it's your first. The expense is minimal, usually about an hour of legal time, and can save you much more in the long run.
Standard leases are typically written in the landlord's favor, so plan on trying to modify the terms presented to you. While your negotiating power will depend heavily on market forces, even in a tight market it's possible to win some concessions. At the same time, it's important to be reasonable and realistic when negotiating changes. An attempt to completely overhaul the lease might sink the deal altogether and have you pounding the pavement looking for "For Rent" signs.
While rent is the obvious negotiating point, other issues to explore include lease length, exit provisions, building improvements and utilities. Unable to get a break in the rent? Ask for utilities to be included, or for the landlord to bear the cost of taking down that wall you wanted to remove. If you're unsuccessful on one point, don't let that stop you from checking on the others. You'll find that landlords can be flexible on some points but not on others. While specific terms should depend on your individual needs, to follow are some of the points to consider in negotiating your lease:
Length of the lease.
Some new business owners want a short lease so that if the business falters they won't be stuck paying rent on a space they can no longer use. Others, banking on business improving over time, want to lock in a low rent for a long period so they won't face the inconvenience of moving or the expense of a rent hike. Try to agree on a term and rent that you're comfortable with, or hedge your bets a bit by arranging a shorter lease and an option to renew for a small rent increase.Tenant improvements.
First, be certain that any remodeling or renovation changes you think you might make-whether now or in the future-are allowed under your lease. Second, ask which of these the landlord will be willing to take care of. Many landlords won't hear of dropping the rent by a penny, but will be willing to foot-or at least share in-remodeling costs.What's included?
Often things like utilities and costs of common area maintenance are overlooked by outlet owners as they peruse store leases. But these small expenses add up fast, so it pays to check your lease to see what you'll be responsible for and see whether you might negotiate a better deal by transferring some of these costs to your landlord (see sidebar, Lease Talk, this page).Subleases and allowable uses.
If competition heats up and you decide to move, you may want to scale back or close down and sublease part or all of your space to another business. Often leases won't allow this without the landlord's approval, unless you insist on changing the terms. Some leases also specify the type of business you can do on the premises, locking you into a specific type of business. If possible, retailers should try to broaden any "allowable business" provision to give themselves greater flexibility to expand in the future.Leasing a commercial space is both exciting and risky, but handled well a good lease can become the cornerstone of your new business. In fact, there's a saying in the commercial real estate business: "Tenants don't get what they deserve, they get what they negotiate for."
-Jay Lynd
| Lease Talk
Finding the legal jargon in your lease hard to interpret? The following are definitions for terms and provisions commonly found in commercial leases.
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