Leasing retail space is a complex process that involves more than just finding the right location. It also requires an understanding of the different types of leases available and how to negotiate the best terms for your business. In this article, we’ll explore the differences between residential and commercial leases, the various types of commercial leases, and the factors to consider when negotiating a lease.
Differences between residential and commercial leases
Commercial leases are vastly different from their residential counterparts. While residential leases are typically shorter in duration and cover fewer variables, commercial leases are longer and involve more complex negotiations. Additionally, commercial leases often require a more significant financial commitment from the tenant, including higher security deposits and additional fees.
Importance of negotiating lease terms
The success of your retail business depends heavily on your lease agreement. A poorly negotiated lease can result in significant financial losses and prevent you from meeting your business goals. Therefore, it’s crucial to understand the terms of the lease and negotiate favorable terms that protect your interests.. To begin with, you should carefully review the lease agreement to ensure that it accurately reflects your understanding of the terms and conditions. It’s also essential to evaluate the location of the retail space, the size of the store, and the duration of the lease before entering into negotiations with the landlord.
During the negotiation process, it’s important to keep in mind that both parties have their own interests to protect. You should be clear about your needs and expectations, but also be willing to compromise on certain issues to reach a mutually beneficial agreement. It’s also a good idea to consult with a legal professional who can provide guidance on the legal implications of the lease agreement and help you negotiate favorable terms. By taking a strategic approach to lease negotiations, you can secure a favorable agreement that supports the success of your business.
Types of Commercial Leases
There are several types of commercial leases available, each with its own benefits and drawbacks. Below are some of the most common types:
A gross lease is a type of lease where the tenant pays a single flat rate that includes rent, taxes, utilities, and insurance. This type of lease is most commonly used for commercial properties such as offices and retail spaces.. One advantage of a gross lease is that it provides tenants with predictable monthly expenses, as they do not have to worry about additional costs such as property taxes or utilities.
Since the landlord is responsible for paying these expenses, they are often more motivated to keep them low, which can benefit both the tenant and the landlord. However, one potential downside of a gross lease is that the flat rate may be higher than what the tenant would pay if they were responsible for these expenses individually. As such, it is important for tenants to carefully consider their options and evaluate whether a gross lease makes sense for their particular needs and budget.
A net lease is a lease where the tenant pays rent plus additional expenses such as property taxes, insurance, and maintenance costs. Net leases are typically used for larger commercial spaces such as warehouses or manufacturing facilities., where the landlord does not want to be responsible for all of the expenses related to the property. In a net lease agreement, the tenant is responsible for paying their share of these costs, which are typically based on the proportion of the total space they occupy.
This can be beneficial for both the landlord and the tenant, as it allows the landlord to avoid the added responsibility and expense of maintaining the property, while giving the tenant more control over their operating costs. Additionally, net leases often have longer lease terms than traditional leases, which can provide more stability for both parties involved.
A percentage lease is a type of lease where the tenant pays the landlord a percentage of any profits made from the business. This type of lease is most commonly used for retail businesses that operate in a multi-tenant retail space such as a mall or shopping center. The percentage lease is advantageous for both the tenant and the landlord as it allows the tenant to pay rent based on their actual profits, rather than a fixed amount that may be difficult to afford. For the landlord, this type of lease provides an opportunity to share in the success of the tenant’s business, incentivizing them to attract and retain successful tenants.
However, there are some potential drawbacks to a percentage lease for both parties. Tenants may feel that they are giving away too much of their profits to the landlord, while landlords may find it challenging to accurately calculate the rent owed if the tenant’s profits fluctuate significantly. Additionally, disputes can arise over what expenses should be included in the calculation of profits and how often the rent should be adjusted.
Despite these challenges, the percentage lease remains a popular option for many retail businesses, particularly those located in high-traffic areas with significant earning potential. By sharing in the risks and rewards of the tenant’s business, landlords and tenants can work together to create a mutually beneficial arrangement that encourages long-term success.
Triple Net Lease
A triple net lease is a lease where the tenant is responsible for paying rent plus all expenses associated with the property, including property taxes, insurance, and maintenance costs. This type of lease is commonly used for commercial properties such as office buildings and industrial parks.. Because the tenant is responsible for all expenses, landlords often offer lower base rent in exchange for this type of lease. Additionally, triple net leases provide a stable source of income for landlords, as they do not have to worry about fluctuating expenses or unexpected maintenance costs.
Tenants benefit from the control they have over the property and the ability to customize it to fit their specific needs. However, they must also carefully budget and manage expenses to ensure they can afford the additional costs associated with the lease. Overall, triple net leases can be a beneficial arrangement for both landlords and tenants, as long as both parties fully understand and agree to the terms of the lease.
Factors to Consider When Negotiating a Lease
When negotiating a lease, there are several factors to consider:
Size of leased space vs. building/complex
The size of the leased space relative to the size of the building or complex can impact the rental rate. If the tenant is leasing a significant portion of the building, the landlord may be willing to negotiate a lower rental rate.. This is because having a large tenant can provide stability to the landlord, as it ensures a steady stream of rental income.
For example, having a large tenant can make the property more attractive to other potential tenants, as it can increase the visibility and prestige of the building. On the other hand, if the tenant is only leasing a small portion of the building, the landlord may be less willing to negotiate on the rental rate, as the tenant’s presence may not have as significant an impact on the overall occupancy rate. In this case, the landlord may be more focused on finding additional tenants to fill the remaining space in the building.
The length of the lease can impact the rental rate. Longer leases typically result in lower rental rates, while shorter leases often come with higher rates.. This is because landlords prefer longer leases as it provides them with a stable rental income for a longer period of time. With shorter leases, landlords have to spend more time and money finding new tenants when the lease ends, which can be costly.
Longer leases provide tenants with more stability and security since they don’t have to worry about finding a new place to live every few months or years. However, shorter leases can be beneficial for those who may need to move frequently due to work or other reasons, or for those who are unsure about their future plans. Ultimately, the decision between a longer or shorter lease depends on individual circumstances and priorities.
Creditworthiness and operating history
The tenant’s creditworthiness and operating history can impact their ability to negotiate favorable lease terms. Tenants with a strong financial history and proven track record may be able to negotiate better terms, such as lower rental rates, longer lease terms, or additional amenities. Landlords prefer tenants who are less risky and more likely to pay rent on time and maintain the property well.
On the other hand, tenants with poor credit scores or a history of late payments may have limited options and may need to accept less favorable terms to secure a lease. It is important for tenants to be transparent about their financial situation and provide references or documentation to support their claims of financial stability. Building a good relationship with the landlord and demonstrating a commitment to maintaining the property can also improve the chances of negotiating favorable lease terms.
Current leasing market
The current leasing market can impact the rental rate. If the market is saturated with available space, landlords may be willing to negotiate more flexible lease terms to attract tenants.. Additionally, if there is a high demand for rental units and low supply, landlords may increase the rental rate to maximize their profits. Other factors that can affect the rental rate include the location, size, and condition of the unit, as well as the amenities offered.
For example, units in prime locations with modern features and facilities may command a higher rental rate than those in less desirable areas or with fewer amenities. Ultimately, tenants should research the local rental market and negotiate with landlords to secure the best possible lease terms and rental rate.
Prestige of brand to landlord
The prestige of the tenant’s brand to the landlord can impact their ability to negotiate favorable lease terms. Landlords may be more willing to work with tenants whose brand aligns with their property’s image.and values. For example, a luxury shopping mall may be more inclined to offer favorable lease terms to high-end fashion brands like Louis Vuitton or Chanel, as opposed to discount retailers like Walmart or Target.
Similarly, a landlord of a residential building with a focus on eco-friendliness may prefer to work with tenants who emphasize sustainability in their brand messaging. The perceived prestige of a tenant’s brand can also impact the desirability of the property as a whole, as having well-respected and recognizable tenants can attract other high-quality businesses and customers to the area. As such, it is important for tenants to carefully consider the image their brand conveys and how it aligns with the property they are interested in leasing.
Importance of Engaging a Tenant Broker
Engaging a tenant broker can help tenants navigate the complexities of commercial leasing and negotiate favorable lease terms. Below are some of the benefits of working with a tenant broker:
Role of tenant broker in negotiating lease terms
Tenant brokers have extensive experience negotiating commercial leases and can help tenants secure favorable terms that protect their interests. They can also help tenants understand the various types of leases available and determine which is best suited for their needs. In addition to negotiating lease terms, tenant brokers can also assist with lease renewals, subleasing, and lease terminations. They can analyze a potential space and provide valuable insights into the local market, including comparable rental rates, tenant improvement allowances, and other key factors that can impact a tenant’s bottom line.
Tenant brokers work exclusively on behalf of tenants and are committed to ensuring that their clients receive the best possible deal. With their expertise and knowledge of the market, tenant brokers can help tenants navigate the complex world of commercial real estate and make informed decisions that align with their business goals and objectives.
Benefits of tenant-rep commercial lease broker
Working with a tenant-rep commercial lease broker provides several advantages, including access to a broader range of properties and landlords, as well as the ability to negotiate from a position of strength. Additionally, tenant brokers can help tenants save time and money by streamlining the leasing process.and providing valuable insights into the local market and specific neighborhoods. They can also help tenants understand the nuances of lease agreements, such as CAM charges, renewal options, and tenant improvement allowances.
Tenant-rep brokers have a fiduciary responsibility to their clients, which means they are legally obligated to act in their best interests. This ensures that tenants receive unbiased advice, and that their broker will work tirelessly to secure the best possible lease terms. Another benefit of working with a tenant-rep broker is that they can often leverage their relationships with landlords to negotiate more favorable lease terms than a tenant could obtain on their own. Overall, partnering with a tenant-rep commercial lease broker can provide significant advantages to tenants seeking to secure the most advantageous lease terms.
Understanding exclusive restrictions in retail leases
Retail leases often contain exclusive restrictions that limit the number and type of businesses that can operate in the same retail space. A tenant broker can help tenants understand these restrictions and negotiate favorable terms that allow them to operate their business without competition from other tenants. In addition to exclusive restrictions, retail leases may also include clauses related to rent escalation, maintenance responsibilities, and renewal options.
It is important for tenants to carefully review and negotiate these terms to ensure they are getting the best possible deal for their business. A tenant broker can assist with this process by leveraging their knowledge of the local market and relationships with landlords to negotiate on behalf of the tenant. Ultimately, working with a tenant broker can help tenants save time and money while securing a lease that meets their unique needs and goals.
Common Clauses in Retail Lease Agreements
Retail lease agreements can contain several common clauses that tenants should be aware of:
As mentioned earlier, exclusive provisions limit the number and type of businesses that can operate in the same retail space.. This is often seen in shopping malls, where landlords may restrict the types of stores that can be leased to prevent direct competition between tenants. For example, a mall might have an exclusive provision that only allows one electronics store to operate within its premises. This helps to ensure that each tenant has a unique offering and can attract customers based on their individual strengths. However, exclusive provisions can also limit consumer choice and make it difficult for new businesses to enter the market. As such, they are a controversial topic in the world of retail leasing.
Zoning and land covenants
Zoning and land covenants can impact what types of businesses can operate in a particular retail space. Tenants should be aware of these restrictions before signing a lease agreement., as they can have significant implications on the success of their business. For example, a zoning restriction may prevent a restaurant from operating in a particular location, or a land covenant may prohibit the sale of certain products.
Thoroughly review the lease agreement and consult with legal experts to ensure that the terms are acceptable and align with the tenant’s business goals. Additionally, tenants should consider the potential impact of these restrictions on their target market and competition in the area. By carefully considering these factors, tenants can make informed decisions and set themselves up for success in their retail space.
Negotiating a commercial lease requires a thorough understanding of the lease terms and the factors that impact rental rates. Working with a tenant broker can help tenants secure favorable lease terms that protect their interests. Additionally, tenants should be aware of common clauses in retail lease agreements and ensure they are negotiating from a position of strength.
Jeanel has 15 years of retail, marketing and brand management experience. She has started an ecommerce business in 2019, after working in corporate retail and real estate as a senior managing director and former consultant. She's traveled all over the world, speaks at world renowned trade shows and events, holds a Bachelor’s of Commerce (B.Comm) and a Certificate in Commercial Real Estate. You can connect with her on Linkedin.