Navigating Commercial Lease Negotiations: Tips for Tenants And Landlords

According to Statista, the commercial real estate sector experienced negative returns in 2023 – something not seen since 2009. Additionally, the average monthly rental cost for shopping center space in Phoenix has been steadily climbing since 2020 – rising from $18.8 per square foot to $24.7 per square foot in just three years. These factors highlight the need for effective commercial lease negotiations – and both tenants and landlords should strive to reach profitable yet sustainable deals. During these negotiations, parties may wish to work alongside experienced commercial law attorneys in Arizona. Consider calling (480) 320-2310 to speak with Harrison Law, PLLC.

What Is a Commercial Lease Negotiation?

A lease is a type of legal contract. According to the Arizona Department of Revenue, these agreements involve real property leased or rented for commercial activities. Examples include office buildings, warehouses, retail stores, parking lots, laundromats, and so on. This is not the same as a residential lease, which involves living space – and different sets of rules apply to residential and commercial properties.

A commercial lease negotiation is the process in which a tenant and a landlord agree on the terms of this arrangement. The most obvious point to consider is the amount the tenant will pay for use of the commercial property. However, there are many other details to consider. A lease agreement may include a specific amount of time that the tenant is allowed to use the property – whether it is a short-term lease of a few months or a long-term lease that spans decades. The agreement should also state who is responsible for paying utilities, insurance, and other costs. Landlords and tenants might not agree upon these details during the drafting stage, and a commercial lease negotiation is the process of ironing out these details.

What Are the Different Types of Commercial Leases?

Commercial lease agreements come in various forms. One example is a “gross rent lease” agreement, which involves a flat rental fee that covers all costs. This flat fee should cover all expenses related to the property – including utilities, insurance, and so on. In a “modified gross lease” agreement, the tenant and the landlord share some of these costs – but not all. If the business consumes a considerable amount of energy during operation, it may make more sense for the tenant to pay the power bill.

A “net lease” has the tenant paying one or all of the following expenses: Property taxes, insurance, and utilities. Depending on how many of these expenses the tenant pays, this may be a “double net lease” or a “triple net lease.” Becoming aware of the different commercial lease options is an obvious first step before the negotiation process – and Harrison Law, PLLC may be able to help businesses learn about these options.

Have a Clear Budget in Place

One tip for tenants is to create a clear budget before the negotiations begin. This may require the company leaders to carefully analyze their profit margins to determine what they can realistically afford to pay in rent while still sustaining their business. Once the company leaders establish their rental budget, they can set clear upper limits during negotiations.

The same logic applies to landlords. If a landlord plans to lease a commercial property, they should determine their target profit each month while accounting for repairs, property taxes, and all other costs not covered by the rental fees.

Consider Starting With a Short-Term Lease

Another tip is to start with a short-term lease, and this makes sense for both landlords and tenants. From the perspective of the landlord, a “test period” could help determine whether the tenant is truly a good fit. From the perspective of the tenant, committing to a long-term lease could be daunting – especially if the viability of the business is not yet clear. After the short-term lease is over, both parties can re-evaluate their options and consider a longer-lasting arrangement.

Consider Competitor Clauses

Tenants may want to consider competitor clauses when negotiating commercial lease agreements. These clauses can prevent the landlord from renting nearby space to a competitor. For example, an entrepreneur might want to open a shoe store in a shopping mall. If the landlord rents a nearby space to a competing shoe store, this could cause the first company to experience less profit. A competitor clause prevents this type of situation from occurring.

Review Termination Conditions

Both parties should carefully review the termination conditions before signing the commercial lease agreement. As the name suggests, termination clauses detail when and how either party may end the commercial lease agreement. This might include damage to the property, crimes committed on the property, failure to pay rent, and so on. Note that in many cases, the tenant must pay the remainder of the unpaid lease fees if they wish to terminate the agreement early.

For example, the tenant might have three months left on their lease with a rental fee of $7,000 per month. If they choose to terminate the agreement early, they may have to pay three months of outstanding fees ($21,000) at once.

Remember That Arizona Has No Law Regarding Rent Increases

Unlike many other States, Arizona has no law regarding rent increases. A landlord is free to increase the rental by any amount when both parties negotiate a new lease agreement. However, they cannot increase the fee in the middle of a lease term – so longer-term lease agreements could offer tenants more protection from inflation.

Contact the Experienced Arizona Business Attorneys at Harrison Law, PLLC

In many ways, commercial lease negotiations in Arizona are the same as other types of negotiations. Both parties must cooperate and strive for a deal that will serve their mutual interests. The general goal is to find out what the other party wants, what they need, and what they are willing to sacrifice. On the other hand, commercial lease negotiations are also distinct in many ways. Someone who is less familiar with the commercial real estate sector could struggle to reach a positive outcome during these negotiations – and it may make sense to work with someone with deep knowledge of this sector. An experienced commercial law attorney in Arizona may be able to assist both landlords and tenants with commercial lease negotiations. Parties may also wish to work with lawyers who have mediation experience. To learn more, consider calling Harrison Law, PLLC at (480) 320-2310.

© 2024 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.