Mastering Lease and Rent Negotiations: Your Path to Success
Strategies and Insights for Commercial and Rental Agreement Negotiations
In a recent interview with a senior writer for AmEx OPEN Forum, we discussed the art of negotiating lease and rental agreements. While the article touched on several valuable insights, I want to provide more in-depth information and practical negotiation tips for mastering this critical skill.
Beware of Situational Power in Negotiation
Suppose you’re a business owner and you need to negotiate – or renegotiate commercial space for your operation – or you’re a new or existing franchisee in the hospitality business needing to negotiate space for your fast-food franchise – or you’re a student trying to negotiate to rent an apartment or condo. In terms of negotiating lease or rental agreements, the first thing that people need to realize is that they need to – and want to negotiate in the first place.
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Negotiating a lease or rental agreement can be overwhelming and stressful for many people. Negotiating in difficult economic times can be challenging, and making mistakes can be costly. This is especially true of the developer or landlord who has situational power and decides to use it. There may be little negotiation flexibility if the landlord or their real estate representative wishes to use situational power!
An example of situational power is when a fast-food franchisee needs “XX” number of square feet in an easily accessible, high-traffic ‘bricks and mortar’ easy-to-access location with a drive-through capability and good parking. After surveying the city’s most desirable area, the franchisee learns there are only two suitable locations – the same commercial landlord owns both locations. The commercial landlord has numerous people interested in leasing the available locations. The landlord could use this situational power to their full advantage. In this case, the franchisee is at a disadvantage. The franchisee should be prepared to pay the full asking price on a cost-per-square-footage basis, and negotiating leasehold improvements could be problematic.
The Art, Science, and Sport of Negotiation
Regarding negotiating leases, the first thing that individuals need to realize is that they need to negotiate in the first place. Most people face the initial obstacle of believing that the other side involved in the negotiation has more power than they do – therefore, whether you are an experienced small business owner – or a student – people tend to believe that the landlord, developer, property management firm, or real estate representative have all of the power in the negotiation.
Negotiating is an art, science, and sport. Indeed, it is an essential life skill designed to maximize outcomes. However, too many people negotiate based solely on instinct – not skill. People must understand whether the negotiation is simple or complex; a process, strategies, tactics, techniques, and proven scripts must be utilized.
Research, Plan, and Prepare
- Research is critical in all negotiations, but most people don’t invest the time and effort to research effectively.
- Proper preparation, planning, and information gathering are essential when negotiating leases or rental agreements.
- Always start negotiating with the landlord or their representative by requesting a detailed proposal outlining the rental rate, fees, costs, terms, and conditions. Getting the other side’s opening negotiating position first is critical to optimizing the outcome.
The Power of Asking the Right Questions
- One of the most important questions I teach people in my negotiating skills presentations, training seminars, learning workshops, and coaching sessions is the “Under what circumstances…?” questioning technique.
- For example, “Under what circumstances could we renew our lease at the current square footage costs?” or “Under what circumstances would you include $34,975.00 worth of leasehold improvements during the three-year lease?” This effective questioning technique helps you understand the other side’s opening negotiating position.
- Contact me to learn more about my proven verbal phrases, questions and questioning techniques for your negotiations.
Carefully Scrutinize Lease-Related Documentation
- I advise everyone to ensure that people read all lease-related documentation carefully because the side that writes the agreement can include content that can work to its advantage – which entrepreneurs and individuals often overlook.
- For example, many people don’t know that maintaining roofing, windows, doors, HVAC (heating, ventilation, and air conditioning), exterior signage, etc., is often the tenant’s sole responsibility. Ensure that expensive items such as air conditioning and heating units are carefully inspected before entering into a lease or rental agreement – or negotiate to exclude your responsibility to maintain, repair or replace them.
- Understand all the details associated with the lease’s gross and net terms and conditions because common costs are often overlooked.
Three things affect the outcome of negotiations:
- Information: The side with the most information and options usually negotiates more effectively, so, for example, gather relevant, reliable, and complete information about landlords, space, and locations and interview other tenants.
- Time: One version of the “80-20” rule is that 80 percent of concessions are made in the last 20 percent of the time left to negotiate, so be careful to avoid time-pressure tactics used by the other side. For example, a landlord or real estate representative might say – “If you want the space, you must sign the lease by 9:00 a.m. tomorrow. If you don’t, we have other interested parties willing to sign.” This time-pressure tactic can impact the outcome, and people sign agreements and contracts falling victim to time pressure. Be careful you don’t fall for this tactic. Assess the reality of time pressure by determining its validity. Be prepared with the right countergambits if this negotiation tactic is used on you.
- Personal Power: Another example of one of the eight forms of personal power is legitimate power in a negotiation. A person with the title of Vice President of Commercial Leasing has implied legitimate power.
Be Careful of “Funny Money”
- Regarding monetary issues, never be seduced when someone uses “dollars per square foot.” In a negotiation, this is referred to as “funny money” – presented with the lowest common denominator (e.g., only $7.50 per square foot) to persuade you to sign the lease. Instead, always calculate the fully loaded costs for your square footage, which include rent, common costs, and taxes.
Always Use “Odd Numbers” when Negotiating
- When presenting counterproposals to the landlord or landlord’s representative that deal with negotiating numbers, never use zeros and always use odd numbers.
- For example, “Based on our research, $7.00 per square foot for this type of space seems high. Although we are interested in renting from you, after calculating the numbers and reviewing our budget, we propose $6.17 per square foot.”
- Keep in mind that a negotiated dollar is a bottom-line dollar. Every dollar you save in the negotiation falls directly to the bottom line, and people can’t make money faster than when they negotiate effectively. A negotiated dollar is a bottom-line dollar.
Always Broaden the Scope When Negotiating:
- Learn how to “broaden the scope” of your negotiations.
- If you can’t negotiate lower square footage costs, ensure you negotiate items such as leasehold improvements, signage, parking, free rent or upgrades.
- One of my clients, a local UPS franchise store owner, was prepared to sign a new lease with the landlord. However, all the storefront windows were constantly foggy and dirty because the vapour seal in between the glass was faulty. I taught him to effectively negotiate the replacement of all the glass panels as a condition of renewing the lease. The landlord agreed, so my client saved over $3,500.00 with this concession from the landlord.
- If you already lease a property during any challenging economy, be prepared to renegotiate your existing lease with your landlord or their representative. Generally, most landlords would prefer to make concessions to a current tenant rather than go through the time-consuming, complex, and expensive process of finding another suitable tenant.
The Value of a Real Estate Agent
Hiring a commission-based real estate agent may – or may not be a good idea. Don’t assume that a real estate agent, lawyer, accountant, or franchisor will properly or effectively manage lease negotiations on your behalf – many of the aforementioned are untrained and ineffective negotiators.
In any negotiation, understanding the intricacies of the process can make all the difference. Learn to become a more skilled negotiator; you’ll be better equipped to navigate the complex world of leases and rental agreements. Many individuals have shared their negotiation challenges and horror stories, emphasizing the importance of mastering this essential life skill.
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