The Art of Lease Negotiations: 3 Essential Points for Tenants
The neighbourhood is perfect. The space is primed for business growth. The view is nice… You’ve found the ideal office location for your growing business, and while the real estate portion of your search is winding down, it’s time to prep for lease negotiations.
Many fledgling tenants imagine the lease process as a cut-and-dry deal. There’s a price, a contract, and a moving date. No need to come to the table with a plan – it is what it is — not the case. Tenants eager to sign on the dotted line and set up shop in their dream office often miss a golden opportunity to negotiate some key conditions and concessions that wind up saving their business thousands of dollars in rent, renovation costs, and capital used to make the space just right for them and their business.
Let’s take a closer look at three essential topics of discussion for tenants during the lease negotiation process.
Abated or “Free” Rent
Abated rent, sometimes referred to as “free” rent (although it’s really not) is typically offered to a new tenant during the first few months of a lease agreement as a way to provide funds for upfront costs associated with moving into the new space, whether that be moving services, tech set up fees, or some minor office-centric renovations like painting, signage, etc.
For tenants it’s hugely beneficial to alleviate the first few months of rent, and for landlords it’s a great way to lease a space that may have sat for years unoccupied. The icing of the cake there is, a space that’s filled and has a lease agreement in writing is better than a space with no leasing prospects.
Further, some landlords may try to offset the tenant rent savings by charging a slightly inflated number to assume once the abatement term has ended. Expect to pay slightly more per month if you can agree to an abatement term, but keep your eye on the prize — there’s no reason why you can’t negotiate a capped inflation rate as well.
Eliminated and/or Reduced Escalations
Leases can be sneaky in their wording. Many agreements include escalation clauses which lay out predetermined increases to monthly rent numbers, often implemented annually. These increases are negotiable, and depending on the office space in question, a tenant may benefit from negotiating a reduced escalation rate, or an all-out eliminated escalation rate for a predetermined amount of time.
Let’s put that into perspective. Your potential landlord may present a 3% annual increase. You may opt to counter with a 2% annual increase, or a 4% annual increase following two years of no lease escalation. Alternatively, you could also negotiate a capped escalation rate of 3.5% on the original lease rate. To secure a new tenant, a landlord may be inclined to agree to a lessened and/or capped escalation rate, or to remove the increase until after the tenant has occupied the space for a couple of years.
Tenant Improvement Allowances
We love discussing tenant improvement allowances, because many tenants don’t even know they can negotiate these types of things. A tenant improvement allowance (TI) are funds that a landlord will provide to a tenant in order to renovate, remodel or overhaul a space to fulfill their particular needs.
TI allowances can include new paint, flooring, or windows — or extensive architectural changes to a space to reconfigure walls or open up a space to accommodate a new office layout. There are a number of ways to do this, but your landlord will wish to discuss typically in terms of cost per square foot, or as a lump sum.
In addition to negotiating a dollar amount, tenants would always be willing to aggressively fight for the right to control the hiring and management of any renovations to ensure they are benefiting from the full allowance amount. A landlord, understandably, will seek to hire the most cost-effective contractor to fulfil the scope of a tenant’s renovation wishes, so in order to benefit from the work performed as much as possible, it’s imperative for a tenant to be willing to fight for the right to choose the contractor, and co-manage the construction process.
Negotiating a lease can be an intimidating ordeal, but the light at the end of the tunnel is an agreement that is mutually beneficial to both the landlord and the tenant. Finding a happy medium is critical to starting this professional relationship off on the right foot, and is key to benefiting both parties in the big picture.
The art of lease negotiations is absolutely paramount to perfecting the new office space search. The crown jewel for most may be the shiny new space in the hip new neighbourhood – but for inspired and savvy entrepreneurs, it’s the success of the lease negotiation process that they’ll be most proud of.