How To Negotiate A Commercial Lease
Negotiating a commercial lease requires real consideration in order to manage cash flow, whilst still allowing the business to perform at its peak and remain flexible.
Take a look at these guiding principles and follow our advice on how to negotiate a commercial lease which is right for your business:
- Prioritise the lifetime of the asset to your business over periodic payment amounts
- Find the right balance between agreement duration and cost
- Compare a selection of providers
- Choose an effective negotiation team
- And negotiate everything
- Make sure your whole team understands the leasing process
A common misconception about lease agreements is that you should take advantage of being able to secure a favourable rental amount. But when negotiating a commercial lease, there are greater concerns to consider.
The lifetime value of the lease agreement needs to be considered and a decision then needs to be made as to whether it’s still financially favourable to commit to it. And the lifetime value does not just comprise of the number of rental payments (which could be more numerous than first intended in order to make the respective value amount of them lower) but also increased initial rental amounts, delivery and collection charges, admin fees, insurances and servicing or maintenance costs which you’ll have to cover as part of the agreement.
All of those items, not just the rental amounts, is what should be being negotiated.
Staying with the theme of lifetime value of the agreement, a commercial lease negotiation hinges on one side (the lessee) trying to get ultimate efficiency from the agreement and the other (the lessor) trying to secure utmost value.
For the former, like yourself, you can increase the efficiency of the lease agreement by securing lower termly payments (assuming that other particulars like damage charges and other penalties are all favourable). One way to do that is to offer to sign an agreement which is considerably longer than first advertised.
To explain, the lessor will be happy, in principle, to collect lower rental amounts if they can be assured of incoming cash flow for a longer period. The moment a lease agreement finishes and control of the asset returns to the lease provider, it is they who take on all of the ownership responsibilities. They also need to get the asset back onto the market in order for it to start generating income once again.
A private landlord will not like to leave their rentable properties empty without tenants if he or she still has mortgages on them to pay.
As the customer who is looking for a commercial lease, you can (appear to) allow concessions to the provider and “unwillingly” agree to a lease agreement which spans a duration longer than you are happy with. In return, you can command a lower rental amount so that the overall value of the agreement does not grow too high and still represents best value for money.
As further advice, the potential downside to your business here is that you allow the duration to become a bind in itself. A more favourable lease may be offered to you, but you are still in your now-extended original lease period. Or a newer, improved asset may be released, but you are tied into that original agreement for another few years and have very severe early termination penalties.
Whilst it’s a fair negotiation tactic to offer to take as long an agreement as is feasible for your needs in exchange for lower rental amounts, be sure to retain that flexibility and keep as good a balance to it as possible. Thoroughly investigate how long you would be comfortable to possess this asset for to avoid being “stuck” with it.
It’s always wise to compare a selection of price options, especially so when negotiating a commercial lease. Try and find at least three providers for the asset in question who can offer you the chance to compare each option. One may have a more favourable rental amount but another may have a lower overall cost total. However, the latter provider may have overzealous penalty charges so you’ll have to assess the risk of incurring these, versus the benefit of cash flow friendly rental amounts.
The higher the importance and value of this commercial lease, the more thought needs to be put into who negotiates its terms on behalf of your business. Choose the people to do this who will give you the best chance of reducing the pitfalls and maximising the benefits of the agreement in your favour.
If someone in your team has formed previous agreements with this provider or has worked with their representative in the past, as long as the previous relationship was positive, make sure this person is involved.
Relationships are key to long-term commercial relationships and encouraging these when negotiating your high profile commercial lease will help secure a desirable agreement.
Once your team is assembled then negotiations can begin. Break down every part of the lease agreement in order to make sure you get the ultimate amount of value because everything is negotiable.
Duration, waivers, rental amounts and quantity thereof, servicing and maintenance scheduling and costs, extended warranties, optional extensions and expansions…
Anything and everything can be negotiated on a large commercial lease because it’s a competitive marketplace. You can always find another provider, but you can hold the power if you position your business as that perfect lessee that the provider has been looking for.
If anybody involved in the negotiations isn’t au fait with leasing and what’s entailed then educate them - for example, the pros and cons of leasing so that they understand why the potential risks will be outweighed by the benefits should the negotiation go well. Or even just knowing the basic principles and concepts could help improve proceedings.
Pick up a copy of the Ultimate Guide To Leasing and distribute it amongst your team. In particular, it’s advisable to pay attention to how IFRS 16, the biggest change to leasing in a generation, will impact your next commercial lease negotiation. What you’ll see is that leasing is still as beneficial as ever and the changes to lease accounting standards can be turned into an opportunity: