Because commercial leases can have a major effect on a business’s profitability, we talked with Robert McBride, Commercial Real Estate Endorsed Local Provider (ELP) and broker in the Atlanta area. Here’s what Robert had to say about how to negotiate the right commercial lease contract for your business.
Contracts may not provide any mystical protection from lawsuits or bad deals, but they can be complex, especially in commercial real estate. What’s your advice?
In the commercial tenant-landlord relationship the unrepresented tenant is at a significant disadvantage. Most landlords are represented by commercial listing agents, but even those who aren’t are far more experienced with commercial leasing than the business tenant.
A commercial lease is a much more complex contract than a purchase and sale agreement because it concerns a relationship—not a single event. Look at it this way: a lease covers a period of time in which any number of events, both planned and unplanned, could occur. It’s essential that someone familiar with commercial leases make sure most common contingencies are covered before you sign.
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The drafting party usually wins the fine points of a contract negotiation, but in the commercial leasing world, the landlord’s attorney almost always drafts the lease. How does a business owner make sure the lease meets his needs as well?
Most leases are dramatically lopsided to the landlord’s advantage and many business tenants will sign them with little modification. This is not malicious on the part of the landlord. They are simply protecting their interests, which is the responsibility of each party. The tenant needs an experienced commercial leasing professional to make sure his interests are protected. Landlords will gladly make concessions if they are requested, but not if they aren’t.
A note of caution: Commercial brokers are not attorneys and should not draft contracts or amend them. So why use a commercial tenant broker? Because an experienced commercial tenant broker, also known as a tenant representative, can negotiate 90% o the contract before it goes to a commercial leasing attorney for review and editing of the legal language. An experienced commercial attorney can easily charge over $200 per hour but a commercial tenant broker’s services are free to the tenant.
What’s your experience with business owners who have negotiated their own commercial leases?
Many people who have negotiated their leases by themselves call me to help them with their leases once they’re in trouble.Often, they are smart business people who will say, “I thought I got a pretty good deal,” meaning they were happy with the cost of the rent.
Think of a lease like you would insurance. You won’t notice the problem with a poorly written insurance policy until when you make a claim. And, like insurance policies, if a lease doesn’t have a clause to protect the tenant in the case of any number of problems, it can’t be added once those prolems occur. In other words, it is better to have the protection and not need it, than need it and not have it.
How does a business owner make sure their lease contract is a win-win for both parties?
Many landlords are turned off by a prospective tenant who plays games, is dishonest or overly aggressive during negotiation, even if they are desperate to fill their spaces. This is not to say the tenant should accept everything in the first offer. The commercial leasing negotiation is a give-and-take like any other business. The goal is to get a lease with a balanced measure of rights, responsibilities and protections for both the tenant and the landlord. An experienced commercial leasing agent will know how hard to push and what should be expected from a negotiation.
How does a business owner negotiate extensions, renewals and options that are to their advantage?
This is where a good tenant broker can help. Extensions, renewals and options are important, but can be fairly worthless when added to a bad lease because the unmodified lease that the landlord’s agent gets most unrepresented business tenants to sign is like a minefield. It is filled with technicalities that will cause the unsuspecting tenant to default without even realizing it. For instance, many leases contain unrealistic time limits to perform a certain requirement of the lease. As a result many tenants are technically in default and don’t realize it, and can prevent the tenat from exercising extensions, renewals and options included in the lease contract.
Will I be able to sign as an officer of the corporation if my business is newly established?
Most landlords will agree to this if the tenant is an established business with a proven track record, credit and assets. Start-ups will struggle to find a landlord comfortable with this arrangement, especially if the landlord is expected to contribute money to improving the space. Often we can get the landlord to agree to a clause that will release the personal guarantee after a number of years of good payment history.