Real Estate Talk: Negotiating retail

The factors in negotiating commercial retail space

By Joseph Marovitch

October 12, 2023

I am both a commercial and residential broker. A good part of my work is commercial retail leasing. Retail space demand for boutiques and restaurants has appeared to increase in the past few months. However, many interested parties are negotiating for space, terms and rent based on what they have budgeted and not much else.

When negotiating a lease, there are factors to decide upon that will be acceptable to the landlord and the tenant, including:

• Location
• Monthly base rent (additional rent such as tax and utilities are not usually negotiable)
• Fixturing period (number of months to prepare the space rent-free before opening, except for tax and electricity)
• Term of the lease (start and end date)
• TI (Tenant Improvement) allowance. If a lessee requires some funding to fixture a space, sometimes the landlord will offer an amount of money in the form of reduced rent or cash up front, which would be divided by the term of the lease and added to the rent.
• Option to renew at the expiration of the lease. An option to renew for “x” years ensures the tenant does not have to vacate at expiration, and the landlord cannot rent it from under their nose.

There are other terms to negotiate depending on the type of business and its requirements.

There is no commitment from either party until a final lease is signed with terms agreed by both lessee (tenant) and lessor (landlord).

Many potential entrepreneurs attempt to negotiate without making a formal written offer to lease because they do not realize that the offer is not a commitment, it is an offer to negotiate. There is no commitment from either party until a final lease is signed with terms agreed by both lessee (tenant) and lessor (landlord).

Good landlords want tenants who will succeed, remain as long as possible and grow their business. This allows the landlord to thrive and have few headaches. Therefore, before a landlord can agree to the best possible rent and terms for the potential tenant, the landlord must know the following:

• The lessee’s credit rating
• Amount the lessee will be investing in the space
• The term of the lease
• If the business is an expansion from an already existing business
  or
  If the potential renter has a good business plan and funds to start up

Basically, if a potential lessee has a good credit rating, substantially invests in the space, is an existing business, or is a well-funded and planned-out business, a landlord tends to be more flexible in terms and rent. It is preferable to have a solid tenant for the long term than the promise of more rent but a bad business that closes quickly.

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Next article: The seller’s declaration

State of the market

CPI today (inflation rate): 4%
Bank of Canada interest rate: 5%

Supply is increasing as mortgages come up for renewal, and owners are hard hit with rising carrying costs and rates. Inversely, demand is waning for the same reasons. It does not mean there is no sun on the horizon. Increased supply and decreasing demand mean lower prices. Chances are there will be another interest rate hike as rates and inflation rise and fall together. It may offer some buyers a chance to purchase at a lower price if they can manage the expenses until, and if, the rates decrease.

‘… the market is more complicated than in the past. Knowledge and experience are necessary more than ever to avoid legal issues and negotiate the best price and terms.’

With a new war in the Middle East and a continuing war in Europe, it is difficult to say what comes next. Once again, there are many moving pieces, including American politics with no speaker of the house. Depending on who is elected speaker will affect our economy, and one party does not want to fund Ukraine, and the other does. Not backing Ukraine and allowing Russia to win will complicate, if not threaten everyone’s economy, not to mention security.

We are in a buyer’s market, and some are selling. However, the market is more complicated than in the past. Knowledge and experience are necessary more than ever to avoid legal issues and negotiate the best price and terms.

Have a great week.

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