If you will be renting a space for your business, the lease will be the document that lays out the expectations for both you and your landlord. There are some standard elements that will be included in your lease, but there are also parts you can negotiate before you sign to get more favorable terms for your business.
Lease terms to negotiate:
- Length of lease: Month to month or over a number of years?
- Price per square foot.
- What sort of property insurance is included (e.g. fire, flood)?
- Are utilities included in the lease price?
- Who is responsible for property maintenance and repairs and bringing the building up to code?
- Are renovations or modifications needed? These are also called Tenant Improvements (TIS)
- If so, what are the costs?
- Who will be responsible for obtaining the necessary permits and inspections from the City? Tenant improvement costs may be negotiated as part of the lease/rent.
- Is the building up to code? Are there deferred maintenance issues?
- How much can rent increase each year?
- Who is responsible for property taxes?
- What happens if your landlord decides to sell the property, or a neighboring anchor tenant leaves?
- Options to sublet the space, transfer the lease to a new business owner, or terminate the lease.
Consider the the time it will take to get your business up and running.
If you're planning to make renovations, serve alcohol, or conduct other activities that require a license or permit, keep in mind that there may be delays that are out of your control. Try to build flexibility into your lease in case it takes longer than you thought it would to start bringing in paying customers. For example, you can negotiate to have the space for the first two or three months rent-free, or make the lease contingent on obtaining all the necessary licenses and permits.
Letter of Intent (LOI)
A Letter of Intent is a document drafted either by your or your potential landlord that expresses your seriousness about proceeding with negotiations for the space. It is not necessarily legally binding, like a lease, but lays out some of the basic terms you have discussed with your landlord and outlines a preliminary commitment to the space.
It may be a good idea to draft an LOI and share it with your landlord after some initial negotiation but before signing the lease, so that you can take the time to check with Zoning and make sure your business is allowed at that location.
How to write a Letter of Intent
Draft and sign the lease
Once you have confirmed your location with zoning and have come to an agreement on the terms of your lease with the landlord, your landlord will draft a lease and you will sign it. Landlords often have a lease template they use and will fill it in with the terms you agree on. Make sure you review the lease carefully before signing to make sure it reflects what you discussed with the landlord.
Professionals who can help
It's always a good idea to consult with a professional or an experienced mentor who can help make sure you're considering all of the angles.
Commercial brokers work on commission which means they represent you in the negotiations. They help negotiate the lease terms such as who will be responsible for repairs, taxes, common area expenses, etc.
Brokers are not allowed, by law, to render legal advice, and a lease is a legal contract. Brokers only get paid if and when a lease is signed. Consider using a different commercial broker than the one representing the landlord. Avoid using a residential real estate agent to negotiate a commercial lease for you. The Minnesota Commercial Association of Real Estate (MNCAR) is the professional association of commercial real estate brokers in Minnesota.
Real estate lawyer
Retail leases are detailed, complex legal documents. Having a leasing specialist look it over will protect your interest. They will help with the lease review, interpretation, and negotiation. Leases are legal documents and can be confusing and full of jargon that obscures meaning. A good real estate lawyer can read and interpret these legal documents, and help negotiate lease clauses that could be harmful to you.
Technical Assistance Provider
The City’s Business Technical Assistance Program (B-TAP) partners with nonprofit organizations throughout the city to provide free technical assistance and business consultation to small business owners. Staff of these organizations are prepared to answer your questions about many aspects of your business, including the lease negotiation process.