How to Negotiate a Lease Agreement When buying a Business
Buying a business in California and need to negotiate a commercial lease agreement? Start by getting a copy of the current lease and looking for hidden costs. Know your leverage, understand the market rents and location, and have an attorney review the lease agreement. Follow these tips to confidently negotiate a lease agreement for your new business.
What are the terms of the current lease?
A good place for a buyer to start is the current lease with its terms and conditions. It may be the current lease has expired and the owner or seller is month to month or the lease is close to expiring. If you can get a copy of the current lease it will show how the landlord thinks and the items that are important to them.
If the lease is current and has a period run of 12 months or more, you don’t like the terms of the current lease and the landlord is unwilling to make a new lease or offer concessions to you then that’s probably the end of the opportunity to buy that business and so it’s onto the next. The only variable is to have a conversation with the seller to see if he’s willing to offer a concession to offset your objection.
Due diligence on the lease
As the buyer of the business, you are able to negotiate a due diligence period to check out the representations of the seller and make sure they are accurate. While there is no official due diligence period prior to signing a lease there are items to check to make sure you uncover any potential problems.
For example, if the business is in a shopping center or strip mall, talk to the other business owners to see if they are happy and why or why not. Don’t talk to the employees, talk to the business owner or the General Manager as they will know.
Does the lease include fees for CAMs or Common Area Maintenance fees? If so, check how the fees are applied. Some clauses allow the landlord to exclude the anchor tenant from paying any fees and therefore the fees are levied proportionally on the smaller tenants and this can make it expensive. In some cases the fees are levied in proportion to the existing tenants, that is, if the shopping center has a high vacancy rate, the landlord is getting no rent or CAMs from this vacant space so they spread the actual costs amongst the existing tenants making the CAM costs per month very expensive.
Another item to check is to see if the real estate and building are for sale. If it is sold it will probably sell for a higher price which means property taxes will increase and this higher cost will flow to those that have signed a lease.
How much leverage do you have to negotiate the lease?
Most buyers of a business where a lease is already in place do not have too much leverage. That is, they are unable to make requests of the landlord to lower the rent or no longer make certain charges as the current lease is signed and in place and the owner is probably meeting the requirements of the lease. If the lease is close to expiring or the current business is not performing well then the landlord should be willing to negotiate; especially if they have vacancies.
What’s the market doing for commercial leases?
If the landlord is willing to negotiate, an essential strategy for the buyer is to fully understand their position. This includes knowing if the current lease space is too big, too small, or just right. It also includes knowing if the location is right, and what rents are being paid in the immediate area to understand that the rent being paid is competitive. Right now in this economy, a tenant should fight for small and infrequent rent increases as this will help make their business competitive.
Does the buyer need an SBA loan?
An SBA lender typically requires the lease to correspond to the length of the loan. That is, if the buyer of the business wants a 10-year SBA loan, the lender will require a 10-year lease for the buyer. It doesn’t mean the buyer has to sign a full 10-year lease. If the buyer thinks they want to move the business, the lender may be willing to allow the buyer to sign a 3-year lease with one 3-year option plus one 4-year option. This lease may not appeal to the landlord as they would prefer to keep the tenant so they may offer a better lease if the business buyer does a 5-year loan with one 5-year option.
A lease can be a long document filled with legalese. Have an attorney review the lease so they explain the different clauses and you are aware of the responsibility you are taking on when you sign the lease. Having the lease reviewed by an attorney whether it’s the current lease or a new lease.
If you would like more information about buying a business please visit my webpage Buy a business or buy a copy of my book Successfully Buy Your Business.
For more immediate help with buying a business, you are welcome to send an email to Andrew Rogerson or give me a Call Toll-Free at (844) 414-9700
Currently purchased a business without a signed lease. However did get confirmation of what the lease will be by the building owner.
Come to find out the owner could be selling the building and we are now very concerned.
There are lots of different variables currently at play but very concerned we just got screwed.
Any advice or opinion would be appreciated. kmhaynie@yahoo.com
Thanks,
Kyle
From what you’ve written, this seems to be quite complicated and layered. The best advice is to probably collect any emails and other written documents that show:
1. What the seller understood would happen.
2. What the building owner said would happen.
3. What any other advisors/agents/attorneys/lenders etc. including other parties involved in the transaction said would happen about the lease.
Bring the above together and now write to the building owner to look for the lease you need.
Be proactive and get this issue addressed.
Welcome to being a business owner. It has its ups and downs and so be comfortable, dealing with business ownership questions and challenges is a typical thing.
Good luck.
I am buying a small business when their triple net lease is up. I will be signing a new lease when I buy the business. We just found out that the ac/heat system has never been replaced in 30 years and it hasn’t been maintained at all. It is completely failing and it will never pass an inspection. Since it is a triple net lease and it states in the lease that the tenant is fully responsible for this repair. And also that at the end of the lease the system must be in the same working condition as when the lease was signed, In which it is not.
I am very hesitant to sign a lease until the owner fixes the system. They have broken the terms of their lease because they never properly maintained the system at all. And in fact they have worked on it themselves using zip ties and duct tape so it’s not even up to code. If I sign the lease I will be responsible for the sellers willful neglect correct?
Please help!!
I agree with your assessment that you do not want to sign the lease until the AC/Heat System is brought up to date. That is, when you sign the lease with the landlord, you want to know the equipment is in good shape.
I would first look to the seller of the business to bring things up to date at their cost if it has been the seller’s responsibility all along.
I would also get the landlord to confirm it’s the seller’s responsibility in case the landlord is willing to let the seller of the business off the hook as they have been a good and long tenant. If this happens, I would then have the landlord bring everything up to date and I would then have a third party inspection to confirm everything is in good shape before you sign the lease so you are protected in case something goes wrong a month after you close the sale and start your new lease.
Good luck.