GLENDALE, Ariz. — For the vast majority, the landlord/tenant relationship has different needs for each party, and most are in opposition.
For long-term success, it is important that each party understands that cooperation, compromise and civility go a long way. There can be clauses for dispute resolution but both parties would do well to first set their emotions aside when a dispute arises and attempt to find a win/win solution.
Here is probably the most important tip I can offer: Before signing any document, consult a good lawyer who is well-versed in commercial real estate.
The second most important tip: Protect your personal assets by forming either a subchapter S corporation or a limited liability company (LLC).
Never allow a clause where the landlord addresses you personally. It sounds nice but this practice might weaken the “corporate veil” enough to allow him to come after you. It’s things like this that require involving a good commercial real estate attorney. And while you’re at it, have your attorney help guide you with the proper liability insurance.
The third most important tip: Be sure you can assign your lease to a buyer.
You are investing a lot of money in a leased space. Your primary need is for a long-term lease at rates that you can live with, and is assignable if/when you plan to sell. Yes, a lot of the boilerplate leases will give permission to assign to a new buyer, but the language of most assignments is not in your favor. The landlord can stall until your buyer drops out.
When reviewing a lease, I had a simple line inserted that helped me somewhat: “Tenant shall have the right to assign this lease, and that right shall not be unreasonably withheld.” It’s also important to have language that spells out how much time a landlord has to approve the assignment.
OVERALL STRATEGY: THINK LONG-TERM
Thinking long-term is one of the most important things you can do when negotiating a lease.
Consider the end of the lease term as well as everything in between. Can you renew? If so, at what cost?
One way to find out is to ask the existing tenants. You’ll get unexpected tidbits of information. The landlord wants to know your reputation, but you should also know his/hers!
I guarantee the landlord is thinking about the long term. The main problem I saw over the years was how a lease could go from reasonable to unreasonable by the time the lease term was nearing its end. There is a “power shift” when you want to renew. All of a sudden, your landlord starts saying how the value of the space has increased dramatically. Or at renewal, a few clauses have been quietly changed, almost always at your expense.
If you wait too long to renegotiate, you will lose a great deal of power. Even if there are empty retail spots around you, the landlord knows that it is very expensive and often impractical to move your mat to another location.
Advantages of leasing include lower entry-level costs, and lease-only locations are some of the best to choose from.
But there are disadvantages. Compared to residential leases, commercial renters have no rights other than what is written in the lease, so your best protection is negotiating before you sign.
At the end of your lease, or if you are looking to sell your mat, the landlord has the stronger position. If you have only a handful of years left on your lease, your mat becomes near worthless to sell. Your only hail Mary is to help your buyer secure a better lease, and sometimes they do, provided you come up with a strong buyer.
But don’t expect to get a great sale price based on what a new buyer can negotiate. Your opportunity to do something like that has already passed.
That’s why I liked to begin negotiations with at least seven years left on the lease. This will accelerate your rental costs somewhat, but if business is great, you get enough security to sleep at night at a price that you just may be able to handle.
Some clever landlords won’t agree to any renewal negotiations until the last couple months of your lease.
All these negative factors, and more, is why mat veterans often say, “You gotta own the dirt.” In other words, buy the property if you can.
Check back Tuesday as Part 2 continues with negotiations
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].