How to become a shrewd negotiator of the best rental lease
February 6, 2015
Your rental lease can be a nightmare to negotiate. Be prepared.
Before you begin negotiating a rental lease for your consignment or resale shop, it’s important to have all the information you need. Arm yourself now with the knowledge necessary to negotiate the best rental lease possible.
Rental rates and payments
Many proprietors waive the first month’s rent to provide time to prepare for your Grand Opening. In a slow market, you may also be able to land a 30 or 60-day free rental agreement if you sign a long-term lease. Rates are generally determined one of two ways. They can be based on cost per square foot or a percentage of gross sales, whichever is greater. It is vitally important to negotiate a cap on annual rent increases. The increases usually begin two years after your opening date. In January, RetailWire revealed that developers “have been driving rents to record heights…For example, on New York City’s upper Fifth Avenue, the average rent per square foot is $3,500.”
The cost for early termination of the rental lease
A short-term lease with an option to renew is your best protection from getting locked into a space that may no longer meet your needs. Be aware that this option may come at a higher price though. Since you are obligated to honor the contract even if your business fails, guarantee your ability to sublease the space. Also, add into the contract that your liability will only be for 1 year. You may be able to build in a buyout clause as well.
Add a relocation clause
Safeguard your options by including a relocation clause. This allows you to move or expand if a nicer spot comes available. Also, make sure the landlord cannot bump you out of the space for a higher-paying tenant. Or, move you on a whim. Relocation for temporary issues, such as flooding or construction, should not extend past 180 days. Any substitute space you are offered should be comparable in size, rent and visibility to the one you had.
Explicitly define who is responsible for what
Before finalizing the deal, be clear who is responsible for what. Check to see who is in charge of general maintenance, signage, repairs, utility bills, taxes, common area maintenance and trash collection. Shopping center leases typically include an “as is” clause. You must have the space inspected for mold, HVAC issues, faulty wiring, damaged plumbing and building code violations.
Other important considerations
- The “use” clause, which describes your business, must be flexible so that your inventory can change.
- Negotiate a non-compete clause that guarantees a similar business will not move into your building or shopping complex.
- If parking is limited, ask if your store can claim two or three spots for customers.
- Many businesses housed in small complexes do not open their doors until 10 a.m., so verify that there are no restrictions on operating hours.
- The fees paid to a real estate attorney to review a contract are usually well worth the investment.
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