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Small Business Center

3 Tips for Drafting a Small Business Lease

December 14, 2022

For small business owners opening their first brick-and-mortar stores, negotiating and signing that first commercial lease can be equal parts exciting and nerve-wracking. A signed lease, for many entrepreneurs, means the beginning of a dream, but it also means you’re legally obligated to live up to the terms of the agreement. That’s why “it’s so important to take the time to look at [the lease], spend time with it, and get comfortable with it,” explained Rebecca Fitts, assistant vice president of real estate at Leap, a platform that helps brands expand into retail markets. She was speaking at ICSC NEW YORK about drafting a lease to reflect the unique needs of a small business.

Here are the top three clauses you should think about as you negotiate a commercial lease, according to Fitts.

1. Term

Before signing your first lease, think about how long you want to be open. Is this brick-and-mortar store an experiment to see if you want to make a long-term commitment? Or have you already done your market research and know that you want to be in this space for the long run?

The good news is that lease terms have become much more of a negotiation recently. “It’s not all about 10-year leases on the landlord or the tenant side these days,” Fitts said. “Landlords are really thinking strategically about: ‘What do I want to put in my property? What’s going to last here?’ And brands are thinking: ‘Is this where I’m really going to acquire my customers? Is this where I’m going to make the most money as we grow and change?’” The result is more openness on both sides of the conversation.

If you, as a small business owner, are looking for potential flexibility in your lease terms, ask your landlord to include an option to extend your term of lease should your business succeed. “Even on short-term deals, you can sometimes reach an option, even if you’re not giving a landlord a ton of term,” said Fitts. The key to success in these lease deals is open communication. “You can say to your landlord: ‘I think I’m going to love this space. I think we’re going to do really well here. [For both our sakes], can I have an option in the lease?’” Fitts said.

Another way to protect yourself in the case that you end up loving the space but aren’t confident enough to sign a long-term lease immediately is to ask for a right of first refusal, said Fitts. This lease provision allows you the opportunity to match or exceed the lease term deal if another prospect arises for the unit you’re occupying. In other words, ask for the chance to call first dibs on the space.

Last, for an additional level of comfort during negotiations, you can ask to include a sales-based termination option. In this case, the lease could be terminated if your store fails to reach a certain sales threshold or benchmark. This can turn out to be a win-win. “If you’re underperforming, your landlord probably doesn’t want you to be there either,” Fitts said.

2. Economics (AKA Rent)

Before signing the commercial lease, do your homework to ensure you’re getting a fair price on the space. Research should include rent and sales comps for other spaces on the street or in the property. You also want to have a sense of how many people walk by your potential unit a day. “Unless you’re really unique, you want people to actually come into your space,” Fitts said. For the most accurate perspective, make sure you’re visiting the site at different times on different days.

You also need to read the lease closely, double-checking for additional costs that might show up under clauses like utilities, construction, increases and marketing. If you see something, speak up. For instance, if you notice a requirement to pay into something like a tenant association, “you can say: ‘Hey, I’m only in the space for one year. Do I have to pay the marketing fee?’” Fitts said. Remember, a lease negotiation is a two-way conversation and a negotiation.

3. Existing Space Consideration

Before signing a lease, make sure you understand the physical state of the property and what repairs you’re responsible for. One thing first-time small business owners don’t always pay a lot of attention to in commercial leases is buildout or capex requirements, expenses that go toward adding to or improving a property outside of routine repairs and maintenance — think, a roof replacement.  As a tenant, it’s possible you might be responsible for them. That’s why you want to potentially limit your exposure during lease negotiations. “At Leap, we refer to capital expenditures as the enemy sometimes,” Fitts said. “You got this great space you thought was in OK condition and all of a sudden you have your general contractor or your construction team come in and find things you didn’t really plan for, and all of a sudden your profit-and-loss is getting thrown off course.”

That’s why you need to really look at your space closely. If you’re taking the space as is, survey the unit first, checking that the size is correct, particularly if you’re paying per square foot, and checking whether the ceiling, walls and building systems are in good shape. “I’ve done a lot of deals as is and then gotten in there and did not realize there was too much or no framing in the walls, which ended up costing a lot of money,” Fitts said.

If you notice small things, don’t be afraid to ask your landlord to help make small improvements to the condition like fixing door handles or putting on a fresh coat of paint, even if your lease term isn’t long. “Your landlord may feel that it’s in their best interest to improve the space for you and you will keep it in really great condition,” Fitts said.

If, on the other hand, you’re signing a long-term deal and anticipate some major buildout costs, think about asking for a “tenant improvement allowance.” The landlord can support your construction by doing some of the work itself or can give you some money to handle the construction.

Don’t hold back on requests and questions during the lease negotiation process. It’s much harder to ask for things like buildout help after a lease is signed.

When it comes to lease suggestions for small business owners, “My No. 1 mantra is to have open, honest, equitable conversations about what you can really do,” said Fitts.

And remember, it’s in everyone’s best interest for you to succeed at a property.

By Rebecca Meiser

Contributor, Commerce + Communities Today and Small Business Center

Small Business Center

ICSC champions small and emerging businesses in getting from business plan to brick-and-mortar.

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