In 2023, physical retail is vital to a unified commerce strategy. Online and brick-and-mortar stores complement each other—building brand awareness, increasing customer engagement, and driving sales.
But the retail leasing process can be overwhelming. Choosing the right location is critical. And the wrong lease terms could disrupt your business or result in unexpected costs.
We’ve compiled a list of boutiques’ top five mistakes when negotiating a retail lease. We’ve also included five tips to ensure you negotiate the best lease for your business.
What is a retail lease?
A retail lease is an agreement between a landlord and tenant to use retail space. This legal contract outlines the rights and responsibilities of both parties—including rent, permitted use, maintenance, repairs, and termination.
Permanent vs. temporary leases
There are two types of retail leases: temporary and permanent. A temporary lease is month-to-month, and the landlord and tenant can terminate the lease upon notice. A permanent lease typically lasts at least one year.
Types of rent structures
Different types of rent structures also exist. Here are the most common.
- Triple net (NNN): The tenant pays separate fees for base rent, common area maintenance, and real estate taxes.
- Gross + tax: The tenant pays base rent and a separate fee for real estate taxes.
- Gross lease: The tenant pays one flat rental fee.
- Percentage-rent only: The tenant pays only a percentage of sales. This type of lease is less common.
5 common mistakes retailers make when negotiating leases
Whether signing a new lease or renegotiating an existing lease, managing the lease process can be challenging. Here are five common leasing mistakes we see retailers make.
1. Tenants do not have a realistic timeline or budget
There is nothing like the excitement of opening a brick-and-mortar business. It can also be necessary for growth—especially if you’ve exhausted your current space.
Unfortunately, the leasing process can take months. Many tenants forget to allocate time for research, negotiation, build-out, and hiring employees.
Other retailers don’t do their due diligence on city or landlord requirements for the space—such as the design requirements or city permitting. These oversights can delay construction or add unexpected costs.
2. Tenants do not consider alternative locations
It’s better to have options in any negotiation. But tenants often move forward with one location without establishing a backup plan.
Lease negotiations can break down at any time. A landlord will likely market the space to several tenants. If the landlord leases the property to someone else, you’ll have to start over. Or there may be a proposed lease term you just cannot accept.
With options, you won’t feel pressured to agree to lease terms that may hurt your business. You will also be in a stronger position to negotiate and may secure a better deal.
Renegotiating a lease with the landlord can also be tricky. Sourcing alternative locations is crucial when your lease is ending—even if you prefer to stay in your current storefront. If you can’t reach an agreement, another option can help minimize disruptions to your business.
3. Tenants are unaware of the total cost of occupancy
Often, tenants focus only on base rent. But hidden expenses in the lease may increase your occupancy costs, such as:
- Annual increases: The base rent will include yearly increases. Tenants should understand what those increases are and when they take place.
- Common area maintenance (CAM): Tenants pay CAM to the landlord to maintain common areas. The landlord may include annual increases for CAM as well.
- Real estate tax (RET): Tenants pay a proportion of the property taxes based on the size of their space. Tenants should review the language to understand how the landlord calculates this number.
- Utilities: Tenants may pay fees directly to utility companies or their landlords. Reviewing the language is vital if the landlord is responsible for the utilities. Often, landlords will charge an administration fee.
- Percentage rent: Landlords may also charge a percentage of sales if the tenant reaches a specific sales threshold.
4. Tenants do not understand the lease terms
Besides understanding your costs, tenants should familiarize themselves with the lease terms. This can help avoid difficulties with the landlord or unanticipated expenses. Here are some examples to consider:
- Rent commencement date (RCD): The RCD specifies the day rent starts. For example, landlords may state that rent starts 90 days after they deliver the space to you. You must pay rent even if construction delays or inventory shortages prevent you from opening. Your landlord may also penalize you for not being open.
- Condition of the space: Tenants should inspect the space before possession and specify any landlord or tenant work in the lease.
- Permitted use: This clause specifies the products and services that you can offer in the space. Keep this in mind if you think you may expand your current business.
- Hours of operation: Landlords may require specific operating hours. You should include language in your lease if you need to close unexpectedly or for a holiday. Review local regulations regarding business hours as well.
- Repairs and maintenance: You don’t want a leak to disrupt your business. Make sure you understand what happens if something goes wrong with the building. What is the timeline for fixing it, and who is responsible?
- Early termination clauses: These clauses vary. They can be landlord-only, tenant-only, or mutual. If you agree to a termination clause, ensure you understand the terms—including if you have to repay any tenant allowance.
- Reinstatement clauses: What is the procedure for returning the space to the landlord if you leave?
- Personal guarantees: A personal guarantee grants the landlord access to your personal property if you do not pay the rent. Reviewing and understanding these terms is essential if you sign a personal guarantee.
5. Tenants do not understand local restrictions and requirements
In addition to understanding the landlord’s requirements, it is important to research federal, state, and local regulations. Depending on your use, these entities may have different requirements, including:
- Zoning laws or restrictions on the kinds of products or services you can sell
- Noise and pollution
- Signage restrictions
- Requirements based on the type of use (e.g., if you sell food, you may need a bathroom in your space)
- Parking requirements
- Accessibility requirements
- Business licensing requirements and fees
5 tips to help you lease a retail space
Choosing a retail space is a big decision. Here are five tips for simplifying the leasing process and securing the best deal.
1. Prepare a business plan
Develop a business plan before researching spaces or engaging with landlords. A comprehensive strategy will help you develop a realistic timeline and budget.
At the same time, preparing a business plan will help refine your pitch to landlords. Reputable landlords will do their due diligence on your business and financials. The more professional you appear, the better your chance of securing the space.
And if you face challenges during lease negotiations, you can turn to your business plan for guidance. Here are a few questions to consider when developing your business plan:
- What are your short-term and long-term business goals?
- Who are your target customers?
- What are your business expenses? What is the maximum amount you can spend on a retail space?
- What are your projected sales?
- How do you want your store to look?
- What will be your build-out costs?
- How will you market your store?
- What is your timing?
2. Develop site selection criteria
Choosing the right location for your business is critical. If you don’t have foot traffic or your customers can’t find you, your beautifully designed space won’t drive revenue.
Before touring locations, develop a list of must-haves for your space. Here are a few questions to consider:
- Where are your customers located?
- Who would be your ideal co-tenants? (e.g., being near a gym would be ideal for an athleisure boutique)
- Who are your competitors?
- What size space do you need?
- Does the space need a sink or a bathroom? Do you want an office or storage space?
- Do you need parking?
When you’re ready to tour locations, consider the visibility of the space and foot traffic. Visit the property during different times of the day to understand the clientele. Bring experts—such as contractors—to ensure you don’t overlook anything.
3. Always negotiate
When you’re ready to move forward with a space, the landlord will send you a Letter of Intent. This document will outline the key lease terms—such as the length of the lease and rent. Once you agree on base terms, the landlord will send you a lease agreement.
While negotiating can feel uncomfortable, it’s essential throughout the process. Lease terms must align with your business goals and ensure long-term success.
While a landlord may be unable to lower the rent, you can negotiate additional terms to reduce your risk, including:
- Ask for rent abatement to reduce upfront costs. Rent abatement is a period of time when the tenant does not pay rent—usually at the start of the lease.
- Reduce the deposit.
- Ask for tenant allowance (TA) to reduce your build-out costs. Tenant allowance—also known as tenant improvement allowance (TIA)—is money provided by the landlord to improve a space.
- Ask the landlord to complete any necessary construction work.
- Ask that a personal guarantee “burns off” as you pay rent.
- Negotiate signage opportunities on the property. For example, ask the landlord to include your business logo on any pylon signs.
- Require the landlord to include you in its marketing efforts. For example, ask the landlord to feature you if they are active on social media.
- Negotiate an early termination option. This will allow you to vacate the space early without penalty.
- Ask for an Option to Extend. When your lease expires, this clause allows you to renew your lease at a specific rate. This can eliminate the challenges of renewing your lease.
- Negotiate a Right of First Refusal. If a neighboring tenant leaves, you have the right to expand into the space.
4. Plan for the future
Lease terms can impact your business’s success and potential growth. Planning for the future during the lease process is essential. Here are three items to consider.
- Location: If the demographics or co-tenancy of a location change, how will this impact your business?
- Expansion and growth: What will you do if you outgrow your space or your business changes? Including clauses in your lease that protect your company’s long-term interests—such as an Option to Extend—will help you safeguard your business.
- Reduce risk: Unexpected personal circumstances, natural disasters, or world events can affect your operations. When negotiating a lease, include clauses that help mitigate risk.
5. Review the lease agreement with an attorney
You should consult an experienced commercial real estate attorney before signing a lease. According to ContractsCounsel, the average hourly rate for a lawyer to review a lease agreement is $200-$350 per hour.
Research fees and add them to your business plan before starting the leasing process. The attorney will be able to review the language, understand the rights and responsibilities of each party, and help you avoid costly mistakes.
So there you have it, five mistakes and five tips for negotiating your retail space. Did we miss something, or do have a story about leasing your retail space that you’d like to share? Send us an email at editor@materialretail.com.
