When you start a business, you must decide

Starting and Running a Small Business:

Negotiating a Favorable Lease

Almost all small businesses start out in leased premises; many businesses prefer to use leased space throughout their business lives. By leasing rather than owning, you avoid tying up valuable working capital. Also, it’s easier to move to new quarters if your space needs change. This chapter looks at how to find the right place for your business and how to negotiate your lease.

(top of page)

A. Leases and Rental Agreements: An Overview

A lease is a contract between you and the landlord. A lease can be for a short term (as little as one month) or long term, and it can be written or oral—although a lease for more than a year must be in writing to be legally enforceable. Some people use the phrase “rental agreement” to describe a short or oral lease for which rent is typically paid once a month and the tenancy can be terminated on a 30-day written notice. To avoid confusion, I’ll stick to the word “lease.”

Terminology

Sometimes a written lease talks about the “Lessor” and the “Lessee.” The lessor is the landlord; the lessee is the tenant. If you have a choice in terminology, go with the plain English “landlord” and “tenant”; you’ll reduce the risk of typos!

In theory, all terms of a lease are negotiable. Just how far you can negotiate, however, depends on economic conditions. If desirable properties are close to full occupancy in your city, landlords may not be willing to negotiate with you over price or other major lease terms. On the other hand, in many parts of the country where commercial space has been over-built, landlords are eager to bargain with small businesses to fill empty units. Even in a tight market you may come across some acceptable space that, for one reason or another, the landlord is anxious to fill, giving you greater bargaining power. This is often true where there’s a new building or one under construction and the landlord needs cash. Also, if you’re one of the first tenants in the building, you may get an especially attractive deal, because your presence may help the landlord attract other tenants.

If you find a landlord willing to negotiate, what should you ask for? Since you’re not likely to get everything you want, it’s important to get your priorities straight in your own mind and concentrate on achieving what’s most important. What do you really care about? What would be nice to have but not essential? What benefits can you offer the landlord for things you really need?

A lower rent is likely to be high on everybody’s bargaining list. But how about physical changes in the building? Would you want the landlord to redesign the entryway? Add some office space at the back of the warehouse? Customize the interior for your needs? More or better parking for your customers might be worth more than slightly lowered rent. Your priorities may be unique to your business, so think them through carefully before making proposals and counter-proposals to the landlord.

Let’s look at how you might approach the matter of rent. A landlord who is reluctant to lower the basic rent may be willing make other adjustments—which may be even more valuable. The landlord might do this so he or she can truthfully tell other prospective tenants that you’re paying a high dollar amount per square foot. (It may sound silly, but some landlords do play this game.) For example, in a slack market, the landlord may be willing to give you a move-in allowance. Also, check out what the landlord is willing to do in paying for improvements (often called build-outs) to the space.

(top of page)

B. Landlord-Tenant Disputes

There’s almost no limit to the kinds of disputes that landlords and tenants can have. Your landlord may claim that you’re damaging the building, or that you’re consistently late paying rent or that you or your customers or visitors park in other tenants’ spaces. You may feel that your landlord hasn’t been furnishing services that were promised, such as security, janitorial or landscaping, or that your landlord is failing to attend to the leaky roof or having the windows washed frequently enough.

No matter what the cause, it’s usually best to compromise a landlord-tenant dispute through negotiation. Sometimes a frank discussion and a little give and take by each side can resolve what seems like an impossible problem. If the dispute is serious and not amenable to face-to-face negotiations, have your lawyer help you analyze your legal rights. They may be stronger than you think. Legal trends in many parts of the country have improved the tenant’s position.

If your lease has a mediation or arbitration clause, this is the obvious next step. But even if it doesn’t, you may wish to suggest one or both of these approaches. Going to court can be expensive and time-consuming—something the landlord probably wants to avoid. In short, a sensible landlord has good reason to listen to your complaints and to mediate or arbitrate disputes.

1. Put Your Complaints in Writing

If you think your landlord has violated the lease, put your concern in writing in a straightforward, non-hostile way. State specifically what the violation is and what part of the lease it involves. Deliver your notice or letter to the landlord either in person or by certified mail (return receipt requested). Putting a landlord on early notice can help bolster your legal position if the dispute ever goes to court. If rent withholding is allowed in your state or by a specific clause in your lease, you may want to write a letter or two to the landlord before you hold back on the rent. An example of such a letter is shown below.

Sample Letter to Landlord

August 5, 20___
Arnold Ace
Ace Real Estate Associates
1234 Main Street
Anytown, U.S.A. 12345

I am writing to you about some problems we are having with our store space at 567 Enterprise Drive.

As you know, paragraph 12 of our lease specifically says that Ace Real Estate
Associates will maintain the heating and air conditioning system and keep it in good repair. I have called your office twice this week and left word that the air conditioning is not working. No one has come to fix it or given us a date by which the work will be done. Our customers have complained, and on Tuesday we had to close early.

Also, under paragraph 14 of our lease, the Landlord agreed to replace the broken floor tiles in the entry area within two weeks after we took possession. We have been here for six weeks now and nothing has been done about the tiles. The broken tiles are hazardous.

These are serious violations of our lease. I am requesting that you immediately
repair the air conditioning and promptly replace the broken floor tiles. We cannot operate without the air conditioning during this hot weather. Its lack has already caused us to lose substantial revenues and has damaged customer relationships.

If you do not take care of these matters within five days, I plan to have the work done myself and to deduct the cost from next month’s rent.

If the cost of fixing the air conditioning is excessive, I may choose to
terminate the lease and to sue your company for damages caused by your breaching
the lease, including moving expenses and lost profits.

I hope that this will not be necessary. Please proceed at once to make the
repairs as required by the lease.

Very truly yours,

Peter Olsen

2. Coping With the Threat of Eviction

Many leases contain stern language that appears to give the landlord the right to enter your space and regain possession if you don’t pay your rent on time or fail to live up to some other lease obligation. Don’t be intimidated. No matter what the lease says, in most states a landlord can’t evict you without going to court and getting a court order first. This process requires that you be given notice and an opportunity to present your side of the dispute.

A hearing by a judge—or, if your lease so provides, by a mediator or arbitrator—gives you a chance to explain any legal defenses you have. For example, perhaps the reason you didn’t pay your rent by the first of the month was that the landlord failed to repair the air conditioning as required by the lease. The right to a court hearing also gives you valuable time to develop your case and perhaps resolve the dispute. Court hearings don’t take place instantly. You usually have some breathing space in which to build your legal response.

Excerpted from the “Legal Guide for Starting and Running a Small Business”, by Fred S. Steingold