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How to Negotiate a Retail Lease
Running a business

How to Negotiate a Retail Lease

A retail lease is a crucial element of your business. Ensuring the lease protects you and covers all bases for your business will allow you to proceed with peace of mind. It is important to remember that a retail lease agreement will often favour the landlord. Therefore, as a tenant, you’ll need to negotiate a favourable lease that sets your business up for success. That means, as a potential tenant, you’ll need to read a lease agreement carefully and ask for modifications that suit your needs.

What is a Lease?

A lease is a legally-binding contract that sets out the rights and obligations of landlords and tenants who enter into an agreement.


Retail Leases vs Commercial Leases

Retail leases and commercial leases are often used interchangeably but there’s a difference. A retail lease refers specifically to premises that will be used to sell goods. In contrast, commercial leases tend to cover premises that are used for non-retail activities like warehouses, industrial buildings, or office locations.

Retail leases often cover shop premises located in shopping centres and other retail areas where there may be a cluster of shops. 

These leases are subject to extra protections over commercial leases due to various state-based retail legislation. That means that a landlord has extra obligations within a retail lease.

Usual Obligations Found in Leases

As a tenant within a lease, you will usually have certain obligations. These may include:


  • You can only use the premises for agreed-upon purposes
  • Pay agreed rent in a timely manner
  • You must reimburse the landlord for cost of utilities 
  • Offering a security bond or guarantee to the landlord
  • Maintenance of the premises
  • You provide security for the lease when it’s not in use


Advice For Negotiating A Lease

Ensure you consider the following advice to enter a lease that works for you and your business.

The Length of the Lease

Consider what is best for you as a small business owner. A lease of around one or two years might be advisable so that it doesn't tie you in for too long. 


A one-to-two year lease with an option to renew means you can always extend if things go well and the premises are a good fit. A short lease is also convenient if you feel you could comfortably find a similar location elsewhere if the rents go down or you see a better deal. Of course, you could have an established business that is location-dependent, like a restaurant, and you may want the security of a longer-termed lease.


Research

Just like any business decisions, don’t enter into an agreement without researching comparable rents in the area. Do this to ensure you negotiate a price that’s fair that also takes into account possible rent increase. You can also research the going rate for security deposits and other conditions.

Check Hidden Costs

Check the type of lease. Is your lease a "gross lease" in which all expenditures are included, or a "net lease" in which costs exist in addition to your rent?


In many business leases, the tenant is responsible for maintaining and paying for common spaces. Get the specifics on these expenses up front and haggle with this portion to your advantage. To estimate costs, find out if your company will be in charge of maintaining any particular systems and what their current state is. Set monetary limits on these expenses during negotiations, or agree to a marginally higher rent in exchange for the landlord bearing all expenses.


Directly Ask for Clauses that Suit You


Request changes to the lease that will help you. For instance, if your company suddenly relocates or closes, a condition permitting you to sublet the property can be crucial.


You could also request a clause prohibiting the landlord from leasing any additional space on the property to a company that competes with yours.


A co-tenancy clause will permit you to break the lease if a large business that draws customers leaves the premises. For instance, a large supermarket that acts as an anchor tenant.


Finally, ensure you negotiate how and where you can put up signage for your business.


Carefully Check the Termination Clause


Read the provisions of your retail lease that deal with default and lease termination. You should look for a provision that gives you time to correct a default before being evicted, especially if it lets you pay just one month's rent rather than the full amount due under the lease.


If you feel you need to move before the lease period is up, you should discuss any penalties for early termination with the landlord.


FAQs

What is a retail lease agreement?


A retail lease is a legally binding document outlining the terms and conditions under which one party (the tenant) agrees to rent property from another party (the property owner).



What is the most common retail lease?


Percentage leases are a common arrangement for retail leases, especially for those within malls or shopping centres. In a percentage lease, tenants pay base rent plus a percentage of gross sales of the business.



Why does it matter if my lease is a retail or commercial?


Each state’s Retail Leases Act lays out specific requirements that determine whether a lease is commercial or retail. The tenants are given extra rights and protections if your lease is a retail lease. Tenants have the ability to terminate the lease or even seek compensation if landlords fail to uphold certain requirements.


How do I know if my premises are retail premises and not commercial?


There will be very specific information in your state’s Retail Leases Act with regard to what constitutes a commercial or retail premises. However, as a general rule, your business will probably fall under retail lease legislation if you use the premises for a retail purpose, to sell goods or services to the public, or if you’re located in a retail shopping centre.


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