What you Need to Know Before Renegotiating a Commercial Lease

The author, Andrew R. Levinson, is the Managing Director of Riverside Strategic Advisors, LLC, a small business and nonprofit consulting firm located in New York. He can be reached at andrewlevinson@gmail.com.

As the economy weakens, middle class Americans are eating out less frequently and cutting back on their nonessential shopping. Small business owners – especially those who own their own restaurants or stores – are now seeing the consequences. As their revenue streams have dried up, it becomes increasingly difficult to survive, let alone thrive. Most small business owners report that commercial rent is their primary business expense. Today, many are struggling to keep up with rent obligations that were negotiated years ago, when revenue streams were considerably stronger. Fortunately, most good landlords recognize that having a tenant go under is good for nobody. Now may therefore be a great time to modify your lease—even if it’s not up for renewal. Below are a few tips for doing so.

1. Don’t Wait Until It’s Too Late! The worst mistake distressed retailers make is keeping quiet. In a down market, landlords do not want their properties to go dark because they can’t be sure how long it will take to find a new tenant. So talk to your landlord. Hopefully you’ve maintained a good, working relationship with him. If you let him know the state of your business, you should be able to work something out so that your business survives its rough patch and your landlord won’t need to find a new tenant in a difficult market.
2. Know Your Neighborhood. As with any negotiation, it’s important that you be armed with as much knowledge as possible. Is there a lot of vacancy in your neighborhood? If so, your landlord might be especially willing to work with you to keep you on. What are other folks in your area paying for space similar to yours? If you’re already paying below-market rents, you may not want to “rock the boat,” but if you’re rent is above-market, your landlord should know. And if you’re negotiating a lease renewal, this knowledge will help you determine whether you can afford the time, money, and business disruption associated with moving a business from one location to another.
3. Be Creative with Cash. There’s more to a lease than just the base rent. Some landlords will accept lower base rent in return for a small share of gross sales. Then, as your sales improve, your total monthly rent will increase proportionately. There may be other terms in your lease that you could revisit as well. Perhaps your common area maintenance charges should be reevaluated for fairness, based on the past several years.
4. Keep Track of Time. Some landlords, especially in a sinking market, will accept reduced rent in return for the stability of a long-term tenant. If your lease is going to expire at a time when your landlord thinks he could have trouble renting out the space, you might offer to stay on board for a longer term in exchange for a rent reduction today.
5. Read the Fine Print. Even if you’re not able to renegotiate how much money you send your landlord each month, there might be wiggle room elsewhere in the lease. Perhaps you don’t need as much space today as you did when you first entered into the lease. If that’s the case, see if your landlord will allow you to sublet the excess portion of your space. Or maybe your landlord would be willing to subsidize certain physical improvements to the premises that could increase the value of his property and improve your place of business. A new façade or better lighting may be just the thing you need to bring in more customers.

Obviously the best lease modifications will be custom-tailored to the needs of your business and to those of your landlord. The key to success is to have a dialogue that is as open as possible. In the long run, you and your landlord should both come out ahead.