Mastering Commercial Lease Negotiation: A Tenant’s Guide to Success

Madison Shaner

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Negotiating a commercial lease can be a daunting task for tenants, with significant implications for their business operations and bottom line. Whether securing office space, retail storefronts, or industrial facilities, tenants must navigate the complexities of lease agreements to maximize benefits and minimize risks. In this blog post, we offer invaluable tips and strategies to empower tenants in their commercial lease negotiations, ensuring favorable terms and enhanced peace of mind.

1. Define Your Needs and Priorities:

Clearly articulate your space requirements, budget constraints, and desired lease terms, and neighborhoods or locations that may work well for your needs. Identify must-have provisions such as lease term length, renewal options, and permissible use clauses, prioritizing aspects crucial to your business’s success.

2. Conduct Thorough Due Diligence:

Before entering negotiations, conduct comprehensive research on the property, landlord, and market conditions. Understand comparable lease rates, tenant improvement allowances, and lease terms prevalent in the area to leverage valuable insights during negotiations. Working with a broker who can help in early-stage research and negotiation is often a beneficial place to start, as they can supplement a tenant’s understanding of what the market looks like. They can also negotiate with a leasing-broker to help determine initial terms on your behalf using their experience in the market to help you secure a space that meets your criteria.

3. Seek Legal Counsel Early:

Engage experienced legal counsel specializing in commercial real estate to review lease agreements and provide expert guidance throughout the negotiation process. An attorney can help identify potential pitfalls, negotiate favorable terms, and safeguard your interests effectively. The sooner you engage with counsel, the more they can work with you and any broker to help structure your transaction efficiently. While the idea of spending money on legal counsel as you approach lease negotiations may seem like a drain on precious resources, having an effectively structured lease agreement, and getting your questions answered by a professional can save you funds in the long-term. Commercial lease agreements are notoriously landlord-friendly, so you want to ensure that your interests are protected and your questions have been answered prior to signing a new lease.

4. Negotiate Lease Terms Strategically:

Approach negotiations with a strategic mindset, aiming to secure concessions that align with your business objectives. Acknowledge that it may not be possible to secure every lease term in exactly the way you want, so it is critical to determine which terms you consider deal-breakers. Negotiable lease terms may include rent escalation clauses, tenant improvement allowances, lease renewal options, and assignment/subletting provisions.

The negotiation of your lease terms should include a careful review of provisions related to operating expenses and CAM charges, seeking clarity on what costs are included and how they are calculated. Negotiate caps or limitations on expense pass-throughs to the extent it’s possible, or your landlord is willing to engage in negotiation, Successful tenant-landlord negotiations can help mitigate financial risks and ensure transparency in cost allocation. These discussions should include a list of what can and cannot be included the operating expenses and CAM charges and the controllable expenses related to the property.  

 It is also critical to use the lease negotiation process to clarify responsibilities for property maintenance, repairs, and capital improvements within the lease agreement. Negotiate provisions specifying the landlord’s obligations, timelines for repairs, and procedures for requesting maintenance services to avoid disputes and minimize downtime. This should include a discussion around the maintenance of the HVAC systems, their age and condition.

Incorporate flexibility into lease agreements by negotiating provisions that accommodate future business growth, changes in operations, or unforeseen circumstances. To the extent possible, it is worth it to seek options for expansion, contraction, or early termination to adapt to evolving needs without incurring excessive penalties.

Ensure that insurance and indemnification provisions adequately protect your interests in the event of property damage, liability claims, or other unforeseen incidents. Consult with legal counsel to assess coverage requirements and negotiate favorable terms for risk allocation.

Navigating commercial lease negotiations requires careful planning, strategic foresight, and expert guidance to secure favorable terms and protect your business interests. By following these tips and partnering with experienced legal counsel, tenants can optimize their lease agreements, minimize risks, and position themselves for success in the competitive commercial real estate market.

At Milgrom & Daskam, we have a team of seasoned attorneys specializing in commercial real estate law, offering unparalleled expertise and dedicated support to tenants navigating lease negotiations. Contact us today to learn how we can assist you in achieving your leasing objectives and maximizing the benefits of your commercial lease agreement.

ABOUT THE AUTHOR

SENIOR ASSOCIATE

Madison (Maddie) Shaner joined Milgrom & Daskam as an Associate in 2019. Her practice focuses on corporate and real estate transactions. Prior to joining Milgrom & Daskam, Maddie was an associate at Tyson, Gurney & Hovey, LLC where she conducted oil and gas title examination and assisted in drafting drilling and division order title opinions for upstream oil and gas clients.

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