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How should commercial lease negotiations operate in the present economic climate, Robert Dick reveals

 

Franchisors have recently been saying that their franchisees don't seem to be getting much better lease terms, in comparison to a couple of years ago, even with the economic downturn. So what needs to be done to take advantage of the present economic climate?

Firstly, let's be clear that the tenant is entering into a negotiation and the commercial property agents, who have not been made redundant, are going to be the best negotiators. Compare this to most new business tenants who often don't understand the commercial property market and don't consider developing a negotiation strategy. Whether you are negotiating a commercial property lease or any other contract, there are a couple of key principles that should be followed: do your ‘homework' and develop a negotiation strategy.

Many prospective tenants don't even carry out the basic ‘homework', or explore the market rents being paid in that area. Few also look at the negotiation from the landlord's perspective. Who is the and why would you be a good tenant for the landlord? Remember one of the great advantages a franchisee has is that they are part of a network of established proven businesses. This needs to be stressed to the landlord, for example, a landlord information pack, which highlights the success rates of franchisees, needs to be available to the landlord.

For any business, cash flow in the first two to three years is often critical. Reducing the total expenditure (not just the rent) needs to be considered in developing an offer. Of course the ‘headline' rent is important to the tenant, but it's usually the most important aspect to the landlord as well as the value of his investment is based on this.

Now is the time to be creative in how the offer is structured. Of course make an offer on the rent being asked, and ask for an extended rent-free period, but what other points are of real value to a tenant that the landlord may now be prepared to let you have?

• Most will now accept monthly rather than quarterly payments, improving your cash flow.
• Consider offering an Internal repairing rather than full repairing lease, reducing any maintenance costs and service charges.
• Don't automatically accept paying a deposit; use the strength of your franchise system to negotiate this down. A saving of three months deposit is significant in any businesses early cash flow (and don't automatically accept that the landlord will keep this deposit for the length of the lease).
• Asking for a rent-free period is a must, but also consider offering half rent for an additional period.
• Never accept paying for the landlord's legal costs in the transaction. Some agents still advertise that costs will be paid by the ingoing tenant!
• Propose a cap on any service charges or landlord's costs.

Your negotiation strategy should include a list of ‘must haves', points you are willing to give up during the negotiation and a genuine alternative property (preferably you should be negotiating on both properties). Walking away from a negotiation is a lot easier when you have an alternative property being negotiated. It's amazing how often, what were unacceptable terms become acceptable, when there is the threat of the deal breaking down.

There are some great deals to be had for tenants but now is the time to go into the negotiation with a well-structured strategy and having carried out your homework.

Robert Dick is the managing director of Cirrus Tenant Lease Services, commercial property consultants. Click here to find out more.