How to Renegotiate a Commercial Lease
Rent is often one of a small business’s largest recurring expenses. However, unlike many other fixed costs, a commercial lease is negotiable — even if you’re already locked into a contract. Market conditions can change rapidly, and a well-informed tenant (that’s you) can work to ensure that they’re getting the best deal possible.
Wade Horigan, founder of Silent Partner Negotiators and author of this free guide to lease negotiation [PDF], points to three situations in which it may make sense to approach your landlord: (1) your business is struggling or heading toward closure; (2) the local real-estate market is experiencing a downturn; or (3) your lease is expiring within a year or two.
No matter what your circumstances are, you’ll be in the strongest position to negotiate if you are a reliable tenant who consistently pays rent on time, Horigan says. He also advises against attempting to renegotiate without a clear reason for doing so or if you already have a favorable lease.
“You should not try to renegotiate if you’re in a great deal relative to the area,” he says. “Don’t mess with a good thing just for the sake of it.”
Of course, contract negotiation is a skill, and not one that comes naturally to everyone. The Intuit Small Business Blog asked Horigan for his advice on how to renegotiate an existing lease.
ISBB: How do I go about this? Do I just pick up the phone and tell my landlord, “Hey, I want to pay less?”
Horigan: Asking the landlord an open-ended “What can you do to help?” question is not good. They’ll offer something insignificant, and you’ve just lost your best shot, which is your first shot. Know your reason for wanting or needing a reduction, learn the current market, and go through your sales over the past several years. Then write a proposal that overshoots by 5 to 10 percent what you really want in order to leave room for a negotiation. Don’t get ridiculous, but don’t be shy about it either.
What should be in my proposal?
Put forward your case backed up with what bolsters it, such as negative local market conditions, your sales, or a downturn in traffic to the area because an anchor store closed. Always put the amount you think you should be paying. And look for ways to increase the size of the pie — what you can offer the landlord in return, like a longer contract or taking on more or less space.
Finally, don’t waffle. Know what your emergency statements are. In other words, if your business is going to fail, or you are going to move to a new location based on not getting a reduction, there’s no reason not to at least subtly broach that.
What are some of the common mistakes business owners make when renegotiating a lease?
Being too friendly with your landlord and not handling it like the business matter it is. Be business cordial. Also, if your business is in trouble, start the process before you get behind in the rent. It’s much harder to negotiate out of a hole. The main mistake is not doing enough prep work to put forward a solid proposal the first time around.
What happens if the landlord says “no”? Is that it?
I tell my clients it takes three “no’s” before it’s probably not going anywhere. A no might mean that you just asked for way too much to even garner a response or counter-offer. If you were too subtle in your emergency statement, then the second try can be stronger. The greater your longevity and track record [of paying on time], the better your chances that your landlord won’t want to lose you.