A retail rental agreement is used to lease vacant spaces to businesses that will operate restaurants, shops, malls, and other service and product-based companies. With a rental agreement in place, the landlord can ensure their tenants understand the responsibilities they’ve agreed to uphold. With the average retail lease hovering around five (5) years, it’s very important to draft the agreement right the first time. Should the landlord or tenants desire to have revisions made to the contract, all mentioned parties must accept the proposed changes.
Leased retail space is a type of commercial property, so it can be priced using a variety of methods. Unlike residential leases, which often leave little room for negotiating the terms, commercial leases can be tailored to the specific needs of the parties, allowing for “give and take” in a variety of areas. For example, should the tenant request additional parking spaces, the landlord can counter by requiring them to pay a greater portion of their retail gross income.
Terms commonly involved in retail pricing include the following:
- Price per square foot: This is the standard metric used for pricing commercial property. Almost all retail space will be priced with this value. It’s mainly how the landlord got to this number that can vary from one property to the next, as well as any additional costs that will be tacked on.
- Percentage lease: In addition to the base rent (listed on a per-square-foot basis), retail tenants often have to pay a percentage of their gross income to the landlord. This allows the landlord to “grow” with their tenant, providing the landlord with a greater potential return in the long run. This benefits tenants because the base rent is far lower than what it would be if the tenant was paying a flat fee for rent, allowing them to start their business without unbearable rent payments in the beginning.
- Escalations: To protect the landlord against inflation and rising debt costs, they can raise the base rent by an agreed-upon amount per year. For example, an escalation of $.50/year added to the base rent-per-square-foot is common.
In retail space, utilities, repairs, and maintenance are almost always the responsibility of the tenant. Although the landlord won’t collect as much rent, the fact they don’t have to worry about unexpected repairs (and the costs associated with them) makes the lease significantly more stress free. Extreme repairs, such as replacing the roof, are commonly taken on by the landlord (and only need to be done every 10 or 20 years). Although there are standards in the industry, there are no laws that mandate the structure of the contract. This can all be customized to the preferences of the parties involved.
In general, the longer the lease, the less the tenant will be charged for rent. It gives the landlords a sense of security when they know the tenant will be renting the property for a long period of time, allowing the landlord to plan for the future while not worrying about needing to find a new tenant. While tenants appreciate the lower rates they can get by signing on for the long term, they can find themselves stuck should they need to relocate to a location that has more room, is cheaper, or has more local foot traffic.
As the old saying goes, “location, location, location.” For some businesses, it can make or break success. Property owners understand this, and why buildings or units for rent will cost significantly more in areas that have high foot traffic, are on busy intersections, and/or are home to residents with higher income.
Commercial leases can be exceptionally long (when compared to non-commercial agreements). What makes up these contracts is a variety of clauses and conditions that serve to protect the liability of the parties and serve as documented proof that they agreed to specific terms. Prior to signing the lease, the tenant and property manager will sit down and negotiate the makeup of the agreement until a deal is struck. For example, a lease that allows the tenant to sublet the property can garner a higher rent price. For tenants that don’t wish to have the option, they can attempt to lower the rent by asking to remove the clause.