Rent Negotiation and Lease Tips for Commercial Landlords

The key to becoming a successful commercial landlord (or lady) is the relationship between the landlord (or lady) and the commercial tenant. And the basis of this relationship is the lease between the two. A commercial property lease sets out the financial agreement between the two parties, and the terms of what each of them can expect from the other. For commercial landlords, getting a good commercial lease and negotiating a good rent is essential but also not easy at first. In this article, we will explain commercial leases and provide some rent negotiation and lease tips for commercial landlords.

For landlords, there are a number of reasons why a lease is very important:

• It can provide protected financial security.
• It can ensure that you have a steady income for as long as the lease stands.
• It can nurture an honest, positive relationship between the commercial landlord and their tenant.

Any commercial properties that are rented out to tenants should have a commercial lease – including retail units, warehouses, offices, workshops, and storage units.

What is a Commercial Lease?

A commercial lease is a legally binding document between a commercial landlord and tenant that stipulates the terms, conditions, and responsibilities of both parties during the length of the lease – and, indeed, stipulates the length and nature of the lease.

Here at Boxpod Commercial Property, we work with many landlords when they are looking to find commercial tenants in the UK, and we recommend that commercial landlords try to keep their commercial lease as flexible as possible. This means that both parties are able to adapt to requirements, potentially making it easier to come to an agreement, whilst keeping the number of potential tenants as large as possible. It does mean, however, that negotiation is even more important than for many domestic rental leases that are relatively straightforward.

This does not mean, however, that a commercial landlord cannot have elements that they are NOT flexible about.

Lease negotiation is normal in the world of commercial property, and, in many ways, valuable to commercial landlords.

• It provides the opportunity for landlords to firm up their income security and explain to tenants the reasons why they are being charged what they are. It can help to ensure that rental income is consistent and reduce the risk of there being disputes throughout the lease.
• It can help to clarify landlord/tenant relationships, reducing the chance of any other legal disputes or misunderstandings.
• Landlords can widen their range of potential tenants when listing a commercial property with flexibility and negotiation, opening the door to tenants that might not have initially been considered.
• It can help to build long-term, trusting relationships, with clarity for both parties and a mutual understanding of what is important to both sides.

What are the Main Elements of a Commercial Lease?

The leasing of a commercial property does not necessarily need to be through a third party or agent – here at Boxpod, in fact, we can help landlords to find tenants for a commercial unit without an agent, and this also stands for the drawing up and negotiation of the lease. There are, however, some fundamental elements to a commercial lease that need to be covered. Some of these can be negotiated, but others form part of the landlord’s obligations.

The lease term – refers to the length of the lease. Leases are usually either “short-term” (usually 1-3 years), which provide flexibility to the landlord and tenants, or “long-term” (usually 5-10+ years), which are more preferable to landlords and tenants that are looking for more stability in the commercial property rental.

Break clauses are another option for flexibility and negotiation, essentially enabling either party to end or change the lease after certain conditions that have been pre-defined (including length of time).

This can, of course, be negotiated to get the best outcome for both parties.

Rent and rent review – refers to the amount of money that the tenants pay to the landlord and when. This should outline the base rent (how much and when).

This clause should also include rent reviews – determining whether and when there can/should be rent reviews. Many commercial landlords will align this with market values and/or inflation.

In order for a commercial landlord to find the best tenants for them, the amount of rent that is accepted should be carefully thought out, whilst keeping in mind their own margins and spending on the property.

Building use – commercial property in the UK is given a ‘use class’. This determines what activities are permissible within the commercial property. This is non-negotiable unless the process is followed to be able to change the commercial property’s use class.

Repair and maintenance – this part of the lease sets out each party’s responsibilities relating to the repair and maintenance of the building. This can be a more complicated area, as normally the commercial landlord would take responsibility for certain aspects of the building’s repairs and maintenance – the structural repair and maintenance, for example, and usually any common areas.

Other parts, however, can be negotiated.

Alienation clauses – these clauses outline the tenant’s options relating to subletting or part-subletting, and the transfer of a lease to another tenant. This is another area that can be negotiated with the potential tenants and can make the property more desirable than another.

What is the Commercial Property Lease Negotiation Process

When it comes to the negotiation process of a commercial lease, it is important that a commercial property landlord is prepared and knows what aspects of the lease they are happy to negotiate on, and where the red lines are.

Set out your priorities

Consider your priorities as a landlord –

• What is the absolute minimum rent that you would accept?
• What kind of tenant are you hoping to attract and why?
• Are you looking for a long-term or short-term lease?
• What else is important to you and non-negotiable?

By knowing your priorities and red lines, you can allow flexibility on other aspects of the lease.

Check the competition

It is important to research what other similar commercial properties are fetching on the market, and under what terms. This enables landlords to come up with a competitive price and terms for their commercial property, whilst being able to ensure that tenant expectations are just.

It is also useful as it shows that the commercial landlord is knowledgeable and in touch with the current market.

Create a draft lease

It can be helpful for commercial landlords to enter lease negotiations with a draft lease to base them on. The main considerations should be the main elements that were outlined above.

Consider potential tenant negotiation points

For commercial landlords, it can also be useful to anticipate some of the requests that tenants may have. For many tenants, they are similar requests to others.

Some of the requests may relate to the financial matters and lease length – and break clauses and notification periods, for example.

Other requests may be related to rent-free grace periods, the fitting out of the property, decoration and branding, for example.

Having previously considered these areas, negotiations can be faster and smoother, with better clarity and (hopefully) better outcomes.

What other Lease Negotiation Tips are There?

Once a commercial landlord is starting to negotiate with a potential tenant, there are some common areas where negotiation is likely to happen.

Rent – this is probably the most common area where negotiation is likely to happen. The key here is to be well-informed and prepared to be as flexible as possible. A commercial landlord should:

• Be aware of the market and where the asking price sits in the market compared to similar commercial property
• Be prepared to justify the price that is being asked
• Consider alternatives such as the tenants paying a base rent then an additional amount based on turnover
• Look at a stepped rental increase – starting lower then gradually increasing the rent over time

Repairs and Maintenance – the other main area where there is usually space for negotiation is in repairs and maintenance. Some tenants will be looking for flexibility over elements such as layout and decoration, whereas others might prefer that the landlord takes full responsibility for all repairs to the property, for example.

• Consider which parts of this you are happy to move on – and which you are not
• Think about the possible consequences for the tenants
• Offer a cap on repairs and maintenance costs over which you will contribute
• Ensure that both parties are agreed on the state of the property and any work required at the beginning of the tenancy and provide a schedule of work for repairs and maintenance throughout the lease

Other Issues – some businesses have more specific requirements when they are looking to rent a commercial property. Landlords should try to keep an open mind, especially if they are looking for long-term tenants. Tenants with more niche requirements can be more loyal, especially if they have had to adapt certain aspects of the commercial property.

It is important for landlords to remember that it is essential, once a lease has been agreed, to properly vet new tenants. This will give them peace of mind that the tenants are trustworthy and most likely to stick to the agreement that has been made.

Are you a commercial landlord looking for tenants for your commercial property? List your property with us here at Boxpod, for as little as £12 per month!

Are you looking for a commercial property for your business? Why not take a look at our listing page and find a commercial property near you?