5.X — What to Negotiate #
The lease your landlord hands you is not the lease you have to sign. Every term in it was written to protect the landlord’s interests. Your job is to negotiate the terms that protect yours.
Rent increases. Tie annual increases to a fixed percentage — two to four percent — or to CPI with a ceiling and no floor. Lock the rent for several years and negotiate adjustments every two to five years. An open-ended escalation clause is a cost you cannot model and cannot control.
Percentage leases. If the landlord insists on a percentage lease, cap it at five to six percent of annual sales and negotiate a recapture provision. The recapture provision allows you to deduct your NNN expenses dollar-for-dollar from the percentage rent. On a lease with a $60,000 base, $20,000 in percentage rent, and $15,000 in NNN expenses, the recapture provision reduces your total obligation from $95,000 to $80,000. That is a sixteen percent reduction on the same space. Most operators never ask for it.
NNN caps. Triple-net leases pass building expenses — taxes, insurance, common area maintenance — directly to tenants. If the building sells and gets reassessed, your NNN obligation can spike overnight. Cap your real estate tax liability to the assessed value at lease inception. Cap insurance and CAM increases as well.
Assignment and sublease rights. The day you decide to sell your business, your lease becomes someone else’s problem — unless you negotiated the right to assign it. Get full assignment rights and the right to sublease. At minimum, negotiate a 50/50 split of any spread between your rent and a sublease rate. Without this, you are building a business you may not be able to sell.
Options. Renewal options give you operational continuity and make the business easier to sell. Nail down the first year’s rent of each option period at signing — tied to CPI rollover from the preceding year, not a market rent formula. A market rent determination at renewal gives the landlord pricing power you negotiated away from yourself.
Right of first refusal. If the landlord sells the building during your tenancy, you want the right to match any offer. Thirty days is the standard window. It costs you nothing to have it and may matter significantly if the building changes hands.
Landlord contributions. Tenant improvement allowances — typically structured as a dollar amount per square foot — reduce your opening investment. Negotiate these as direct contributions, not as rent credits that come back to the landlord through increased base rent.
