Because sale transactions typically involve a lot more money that’s changing hands, it’s sometimes easy to assume that sale transactions must be more difficult to negotiate, too. But this oftentimes just isn’t the case.
When you’re negotiating sale transactions, agreeing on price is clearly the most important component within the transaction. In this day and age that we’re living in right now, owners carrying back financing has become much rarer than it used to be years ago, so a very high percentage of today’s purchase transactions are for all cash. In addition, in a very high percentage of these transactions, the buyer is getting financing from their own lender, enabling the seller to receive all cash at the close of the transaction.
This completely eliminates any need to negotiate the percentage of down payment the buyer will be giving to the seller, how long the seller will be carrying back a note for, and the interest rate that the seller will be receiving on the loan. All of this instead is handled by the buyer directly with their own lender, and those terms are dictated by the current prevailing market conditions within the lending industry. So instead of negotiating all of this between the buyer and the seller, we simply now have a contingency period within which the buyer obtains their loan.
But now let’s take a look at all of the things that must be negotiated during a lease transaction. Just as in the sale transaction, the “price” must still be negotiated, and that becomes the amount of monthly rent that the tenant will be paying to the owner during the lease. Then we also negotiate things like free rent—the number of months of rent that the tenant will be receiving for free as an incentive to get them to sign the lease. Then there are also tenant improvements—the things that the tenant wants the owner to do to get the premises ready for the tenant to move in. In its simpler form, this can be just painting the premises and installing new carpet. But if we’re talking about leasing office or retail space, substantial tenant improvements may be required to get the new tenant to move in, and at a substantial cost to the owner, too.
Even in industrial buildings, tenants may ask for more offices to be built inside the building, or for more power to be installed in the building, too.
Then we have the part of negotiating both the commencement and ending dates of the lease, the amount of the security deposit, how much advance rent will be paid, what the cost of living adjustments are going to be in the rent throughout the term of the lease, and how often these adjustments are going to be applied. In addition, will the tenant have any options to extend the lease, and if so, for how long and at what monthly rent? And on top of this, will the tenant have an option to purchase the property and/or a first right of refusal on it?
So as you can see, there are oftentimes many more terms to be negotiated between both parties in a lease transaction than there are to be negotiated in a sale transaction. In these situations you can have the landlord and tenant agreeing on every single point except for how much security deposit will be required, and then that can kill the entire deal!
So recognize that when you’re about to enter into negotiations on a lease transaction, you may need to summon forth your absolute best negotiation skills!
