A Complete Guide to Commercial Lease Negotiations

Best Practices for Negotiating Ideal Lease Terms

We’re diving into the intricacies of GASB 96, a significant standard that government entities need to adopt, especially following the implementation of GASB 87.

For most companies, leases and operating costs are usually the second largest expense behind payroll. Yet, after the initial negotiation, companies often don’t keep track of their lease terms or obligations — and that can mean missed opportunities, overbilling and wasted time.

Because leases are such a big investment, the ability to negotiate or renegotiate a lease is a critical part of managing business expenses. Lease negotiation requires understanding lease components and their implications, and then using that information to negotiate the best lease terms for your business.

A great way to prepare for negotiating a new contract or renegotiating with current lessors is to review your existing lease portfolio. It can help you get a good grasp of your obligations under different leases, which lease terms benefit you (or not) and how much flexibility there may be for negotiation.

How to Negotiate a Commercial Lease

In this guide, we’ll look at three ways you can prepare for and effectively manage your next lease negotiation:

1. Identify Opportunities to Negotiate Within Leases
2. Evaluate Your Existing Leases
3. Seek Expert Advice

Identify Opportunities to Negotiate Within Leases

In general, negotiation plays a bigger role in commercial leases than in residential or consumer leases.

That’s because:

• Companies often have needs specific to their business, such as the way a space is configured or special requirements for utilities and other features
• Lessors may be motivated to accommodate those needs to help seal the deal

In addition, businesses are more likely to lease larger quantities of equipment, vehicles and other assets than a consumer would. Although these leases often require customized contracts based on individual companies’ needs, most commercial leases include some common terms and standard boilerplate language.

These terms and language might be negotiated at the beginning of a lease and then automatically inserted each time the contract renews, with little or no changes over time. However, there are a few factors that can help determine the flexibility and ability to negotiate lease terms.

Factors that Affect Negotiation Power

The amount of flexibility you have to negotiate a commercial lease often depends on the circumstances. For instance, if it is close to the end of a lease term and your landlord wants you to renew, you may have an opportunity to renegotiate a lower cost or other favorable terms.

Other things that may affect your ability to negotiate include the size and value of the leased assets. For example, you may have some leverage to negotiate with prospective landlords if you are looking for:

• Prime locations for multiple retail stores
• Significant square footage for warehousing, a showroom or manufacturing facilities
• Multiple office spaces to accommodate doing business in different locations

The ability to negotiate a lease also depends on the flexibility of the property owner or provider. A landlord who is anxious to fill a vacancy may be willing to negotiate an incentive for you to lease, such as a generous Tenant Improvement Allowance (TIA) for customizing an office space to your needs.

Renegotiation of a lease in the middle of a lease term could be triggered by a hardship of some kind, such as a distressed market, a significant business disruption or even bankruptcy. In these cases, lessors may be more inclined to negotiate so that they get something rather than nothing.

For example, if you lease a large amount of square footage or a highly visible location in a mall or office building, the landlord may work with you on desirable lease terms to avoid having the space sit empty.

Lease Clauses in a Post-Pandemic, Hybrid Work World

As the world recovered from Covid-19, corporate real estate planning became more complicated than ever. Businesses across all industries continue to be in cash-conservation mode, looking to cut costs and remain agile in response to economic uncertainties.

Now, many leases directly consider and may include:

• A pandemic clause, clarifying the rights and obligations of both parties in the event of unforeseen circumstances, such as future pandemics or other force majeure events
• Health and safety protocols, specifying the measures each party must take to ensure a safe and healthy working environment, including sanitation, cleaning, and compliance with health guidelines
• Dispute resolution for pandemic-related issues, establishing a clear process for resolving disputes related to pandemic-related matters, such as rent abatement due to government-mandated closures.
• Government assistance coordination, describing how parties will cooperate in obtaining and managing government assistance programs that may be available during times of crisis.

Even more so, there is now an emphasis on “hoteling” — an office arrangement where employees don’t have assigned workstations and instead reserve or use available workspaces temporarily — as well as spaces created with collaboration in mind, such as huddle rooms, team neighborhoods, and social zones.

These may be incorporated through flexibility in space utilization clause, allowing for flexibility in the use of space, potentially permitting tenants to adjust the layout or configuration based on changing needs or social distancing requirements, or through a negotiated tenant improvement allowance to help offset the expenses associated with incorporating this new office needs.

The widespread effects of the COVID-19 pandemic has had a strong impact on both lessees and lessors. On one hand, landlords whose properties have been affected want to recover as much rent as they can. At the same time, many tenants have been looking for some form of relief from their rent obligations had experienced some level of unoccupancy to their corporate real estate leased properties due to office closures. Still, nearly half (47%) of the companies paid full rent on unoccupied properties — and a small fraction (8%) paid no rent. Regardless, more than half the companies planned to ask landlords for some rent relief, such as application of their security deposit or a rent abatement, reduction or deferral.

Tenants have looked to their leases for clauses like force majeure, casualty or business interruption to save money on rent.

However, these clauses have not been commonly found to apply to COVID-19, given it was unusual to include specific language about a pandemic in lease clauses before the current climate. However, that is something that may change in the future through lease negotiations.

Alternatively, some tenants and landlords have worked together during the pandemic on lease negotiations to ensure that both can stay in business during and after the crisis, and the landlord can continue to collect revenue from assets.

Evaluate Your Existing Leases

Your existing leases are a valuable source of information that can help your business negotiate new leases or renegotiate existing agreements.

Any lease that has been customized to your business needs provides an opportunity for you to identify lease language that has worked in your favor. Moving forward, you can choose to establish that language as a standard to use in new leases or renewal negotiations.

Conversely, if existing leases contain language that has not worked well for your business, you can try to avoid those terms in new contracts or renegotiate them at the time of lease renewal.

What to Look for in Current Leases

Naturally, you want to know what your rent and other lease payments are — but you also want a clear picture of what you are getting for the money. For example:

• How many offices or how much space do you lease from the same landlord?
• What is your cost per square foot?
• Is the cost based on occupied space? Or on total square footage?
• Is your rent comparable to what other lessees in the building are paying?
• Is your monthly payment comparable to or better than the current market rates?
• Are you paying for common area maintenance (CAM) and if so, how?
• Are there other shared costs (such as water or other utilities) and if so, are you paying more than your fair share?

In addition, you should look at your leases to determine whether your termination rights and renewal terms are favorable to your business. How easy is it for you to get in or out of leased spaces?

• Is there a “lease kickout,” or a threshold that allows you to terminate a lease if the location is not operating profitably?
• Is there a clause that allows you to terminate the lease on a retail location if there is a significant reduction in foot traffic or if an anchor store closes?
• If you have multiple leases and critical dates with the same landlord, can you trade off and move locations to make the best use of all the leased spaces?

Lastly, you should know where you are in your current lease terms, to be aware of automatic renewals, deadlines you must act on and possible opportunities to renegotiate before you renew.

For instance:

• If you have several leases with the same landlord — such as space in multiple offices or malls — how much of your portfolio is about to expire? If a large number of leases are involved, the upcoming expirations may give you significant leverage in negotiations.
• Are your lease obligations short-term or long-term? If they are short term, you may soon have a chance to revisit lease language and make changes that will benefit your business.

How to Search for Pertinent Lease Language
With this kind of visibility into the details of your current leases, you are in a position to evaluate whether there is language you would like to renegotiate when a lease renews — or language you want to incorporate or avoid when entering into a new contract.

Manually searching through every lease for specific clauses and language is an incredibly time-consuming and cumbersome task. (Just ask anyone who has implemented lease accounting standards — ASC 842, IFRS 16, GASB 87.)

But by utilizing lease accounting and management technology, you can more clearly identify all your lease obligations and crucial lease language, which enables you to keep track of current financial obligations and critical dates, plus important details to help with future lease negotiations.

For example, lease management software can help you identify if you paid for space you did not use — or overpaid for services such as cleaning or utilities. Armed with that information, you can look out for those issues in new leases or address them in current leases prior to renewal.

With all your leases and important terms entered into a centralized system of record system, you can easily group information, generate reports and view a complete picture of your lease portfolio. You can also view individual lease details and cut data by region, landlord/lessor, expiration dates and other criteria.

Creating a digital portfolio of abstracted leases lets you search for both ideal and low-performing lease language to:

• Identify lease terms that previously worked well for your business and use them in new leases
• Avoid under-performing language in new or renewing leases
• Renegotiate where possible based on what works well and what does not

The lease management system you choose should allow you to bookmark specific language and establish it as a standard that you want to repeat in the future, such as:

• A previously negotiated, favorable holdover rent rate of 125%, versus the typical 150% or even 200%
• CAM pro rata share language that bases the fee on the square footage of the space you occupy rather than the total square footage

Further, a robust lease accounting and management system such as Visual Lease enables you to search for and identify automatic renewals on leases that you negotiated long ago, which gives you the opportunity to easily determine whether the terms are still favorable or if they need to be renegotiated.

Seek Expert Advice

Engaging with professionals, such as brokers or lawyers, can help you make smarter, more informed decisions about your leases. Lease experts can provide sound advice and help you better interpret and understand lease language, the current market conditions and your overall negotiation options.

Consult a Broker

Brokers are not experts in lease documents and legality. However, they can provide insights about the marketplace to help you decide whether to invest in a particular lease. For instance:

• Does it make sense to sign a long-term lease at current prices — or are prices likely to come down further?
• Do current lending rates make buying a better option than leasing in some markets?

A broker can perform a market analysis, which includes the typical pricing in a given area. In addition, brokers often know the lessors and are familiar with their business and reputation — added information that can be helpful to you as a potential lessee.

When you work with a real estate broker, they can help you better understand the current market and what is happening in neighboring communities.

For example, in the aftermath of COVID-19, a broker can tell you if there are have been rising vacancies and falling rents in certain locations. Those are trends that may open the door to negotiating with owners who are eager to have their properties occupied and generating revenue.

The same is true for equipment, vehicles and other frequently leased assets. There, brokers can tell you if prices are down or new stock is not moving — possibly giving you an opportunity to negotiate a price or opt to buy while the market is soft.

Additionally, there are brokers who specialize in meeting different needs based on the health of a business and its goals. For instance, there are real estate brokers who help companies lease high-end spaces. There are also brokers who help companies during situations such as severe market downturns or bankruptcies.

Still, remember that brokers are not experts in the legalities of lease language. Therefore, you should consult with an attorney regarding any lease.

Work with an Attorney

Before you commit to a lease — whether it is new, renewed or renegotiated — you should always work with an attorney. He or she can identify the high and low liability aspects of the lease and help make sure that you:

• Get the best terms in legal protections
• Limit your risks from a casualty and insurance standpoint
• Understand the boilerplate language often included as standard in leases (such as waiving the right to a jury trial)
• Know what all your obligations are according to the lease and agree with those terms

In lease negotiations, an attorney can ensure that a lease includes ideal language to protect your interests. This adds a level of refinement and enforceability that only a legal expert can provide.

Unlike a broker or other layperson, an attorney has the expertise to guide you through negotiations and manage complex lease language such as casualty and force majeure clauses. Just as you should always consult an attorney before signing a new contract, it is also important to have an attorney review the documents for lease renewals and renegotiations. Additionally, there may be times when it is appropriate to use an attorney to revisit previously negotiated boilerplate language.

For instance, when you work with the same landlord for a long period of time or a multiple-lease portfolio, you tend to negotiate some standard language and then update the lease as needed in areas such as:

• Business terms
• Location-specific charges
• Insurance language

Ideally, you can work with the same attorney who was involved in negotiating the original lease, who can compare the documents and redline any changes or additions. At the very least, a new attorney can review the lease to make sure your interests are protected and there are no red flags.

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Get a head start on your negotiation power with a powerful lease accounting and management tool. More than 1500 companies have used Visual Lease as their system of record for all leased real estate and equipment assets. Through proper lease management within one easy-to-use tool, you can simplify and automate lease information that you can leverage for more successful lease negotiations.

About Visual Lease:

Visual Lease is the #1 lease optimization solution provider, empowering organizations to leverage their lease portfolio for strategic financial and operational outcomes. Our powerful and secure platform serves as a centralized system of record for all lease financial, operational and legal data, and is purpose-built to support every team that interacts with a company’s lease portfolio. Informed by nearly three decades of experience, our solutions help companies easily sustain compliance with FASB, IFRS, GASB and ISSB reporting requirements, and mitigate the risks and maximize the value associated with their lease records. Our award-winning software is used by 1,500+ organizations to manage more than 1 million real estate, equipment and other leased asset records globally. For more information, visit visuallease.com.