Joe is planning to open a shoe store. He negotiates a lease in a plaza anchored by a grocery store, thinking it’s a good bet because a grocery store brings in a lot of traffic. But nine months after Joe occupies the space, the grocery store closes. He’s stuck paying high rent and has very little traffic coming to the plaza.
Mary is told she’s getting 4,400 square feet of office space for her HR consultancy. When she measures the space, she discovers it’s only 3,600 square feet; she’s being charged for what’s known as “phantom space,” and doesn’t know what to do to rectify the situation.
Rajiv is building a restaurant in a leased space, and runs into permitting issues and construction delays. He ends up opening up three months late, and has to pay for three months of rent (at $15,000 per month), just because there was no clause in his lease stating no rent would be due until the business opened.
These are scenarios Dale Willerton sees “far more often than I should.” The founder of The Lease Coach has been helping commercial tenants negotiate better deals with landlords for more than 20 years. And he’s emphatic that situations like those explained above can be avoided with some diligent bargaining at the outset.
Contrary to what you might expect from a man whose career is built on helping people sign leases, Willerton feels it’s always better for business owners to buy the property they occupy. “I really believe that paying a mortgage is better than paying rent, because eventually you’ll pay off your mortgage,” he says. “The problem is, 98% of the good locations for a typical retailer or restauranteur are not for sale. You can’t buy them if you want to; that’s just the lay of the land. So, most business owners will be tenants.”
But being a tenant doesn’t have to mean you’ll get burned. Here are a few of his tips for negotiating better leases:
1. Look to older buildings
Across Canada, there’s a flurry of new commercial plazas and complexes being built. As a result, Willerton says, a space that was a prime property 10 years ago is almost yesterday’s news, as a developer has new park a few blocks away. “In my opinion, it is extremely overdeveloped,” he explains. “Developers are building commercial space faster than they can lease it, and when they do lease it, all it’s doing is leaving vacant space behind in properties that were perfectly fine.”
It’s those older properties that are a goldmine for entrepreneurs looking to save some serious money, he says. “If you can get in to one of the older properties and run a successful business, your rent might be two-thirds of what it would be in a new plaza.”
2. Don’t get emotional
Many entrepreneurs have strong emotions about their businesses, and are accustomed to dealing with suppliers who feel the same way. That rarely applies to commercial landlords. “You have to remember a landlord owns the building; that is their purpose for living,” he says. “Whereas a business owner is leasing as a means to an end, what they really want to do is run a hair salon or a restaurant or a chiropractic office. There are different motivations for working together.
“It’s not like a marriage between a husband and wife,” Willerton continues. “A tenant typically has one landlord, but a landlord might have hundreds of tenants. So, for the landlord it’s much more of a business decision. Whereas to the tenant it’s much more emotional.” If you do what you can to leave your emotions off the bargaining table, you’ll get a better deal, he says.
3. Never be afraid to walk away
Anyone opening a business is already taking on a lot of risk. Lease terms that add to that list are usually ones that should be avoided, says Willerton—even if it means giving up a great space. “Walking away from a situation where the landlord is asking for a large personal guarantee from you and, possibly, your spouse, is probably a good idea,” he advises.
For more of Willerton’s advice, listen to this week’s BusinessCast, which you can download by clicking on the iTunes logo below:
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