Negotiating commercial leases: Avoiding letters of credit
Thursday, February 15, 2018
For many commercial tenants, negotiating a good lease or lease renewal against an experienced agent or landlord can be a challenge. While an entrepreneur focuses on marketing and managing, savvy real estate agents and brokers are specialized salespeople. Their job is to sell tenants on leasing their location at the highest possible rental rate.
Tenants may go through the leasing process only two or three times in their entire lifetime — yet they have to negotiate against seasoned professionals who negotiate leases every day for a living. Negotiating appropriate leasing terms is vital for a business owner as the amount of rent he pays will directly affect the company's financial bottom line.
Whether you are leasing a new location for the first time or negotiating a lease renewal for your business, here are two money-saving tips for tenants:
Avoiding letters of credit
Some landlords request letters of credit or security notes rather than personal guaranties. This is where the bank will pay the landlord a prenegotiated amount of money (from the tenant’s bank account) in the event that the tenant defaults on the lease.
This type of security is worse than a regular personal guaranty since accessing this money becomes more convenient for the landlord. Our advice is to avoid letters of credit – whenever possible.
Renewing with no deposit
If your lease agreement requires you to pay a deposit for the initial lease term, it is unacceptable for that deposit for that deposit to continue indefinitely.
Ask yourself, am I a security risk? Have I regularly paid my rent in-full and on time?
If so, resist further security deposits and make sure that you state this amendment in the renewal document. Otherwise, your deposit, which was to be applied to your last month's rent, needs to be replaced for the renewal term.
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