Negotiating a Salon or Spa Lease

Once you have found an ideal location to rent for your salon or spa, the next step is to negotiate a commercial lease agreement. Before doing so, let’s dive into the types of leases and the terminology you should understand before signing on the dotted line.

Types of Leases

Percentage Lease

In the case of a percentage lease, you’ll also need to pay whatever percentage of your sales that have been designated on top of base rent. In a lot of cases, you pay ahead for the base rent and then add on the percentage from the previous month’s sales. This type of lease is most common if you rent retail space in a mall.

Double Net Lease

This type of lease means that you will have to cover your landlords’ taxes and insurance costs in addition to your base rent. The “double” reference denotes two more expenses.

Triple Net Lease

Similar to a double net lease, triple net versions have three additional costs over and above your base rent: taxes, insurance, and maintenance.

Net Lease

A net lease is a somewhat undefined version of a double or triple net lease. You’ll pay for some taxes, insurance and maintenance costs incurred by the landlord, if not 100 percent of one or all of them. The percentage can often be negotiable.

Fully Serviced or Gross Lease

This type of lease offers a fixed amount of rent, which includes all of the little extras short of any listed assessments. With this type of agreement, your landlord will take responsibility for paying for the taxes, insurance, building and common area maintenance, and service fees and will likely pass the cost down to you as a “load factor.” A method of calculating total monthly rent costs, the load factor is figured by combining usable square feet with a percentage of the square feet of common areas used by all tenants. Common areas typically include restrooms, elevators, stairways, hallways, a lobby, building security, even common areas with landscaping and parking facilities. This “fully serviced” lease will most likely be substantially more than “base rent.”

In addition to considering the types of leases above, be aware of these other details.

Length of the Lease

The length of the lease is essential. If you are going to invest in your facility with hair stations, custom furniture and fixtures, and upgraded plumbing and electrical, you want to be sure that you have secured a lease for at least five years. For salons, five to ten years is a good range. Otherwise, your landlord will have the upper hand and can raise your rent as high as they’d like after your lease is up. Nobody wants to invest the time and money to build out a salon and then be forced to move a year or two later. Even three years is not that much time in the grand scheme of things. So, the suggestion is to go for five years with an option to renew and to add a contingency that you can leave the agreement should you decide to trade up to a larger unit in the same complex or within a property that the owner manages.

Exit Strategy

Think through an exit strategy. We all know that if you plan for failure, you will know how to avoid it. Should your business fold for any reason, you need to have a way out of your lease. In some cases, owners will offer a buyout amount that you pay before exiting the premises. It effectively lets you out of the contract and allows the owner to show the property, even if you are still an occupant. Otherwise, you will be held accountable for the full amount each month for the term of your lease, or until the landlord can find another tenant. In the case of a bankruptcy, the owner will not be able to collect and may have to evict you instead.

How your business is set up dictates how far your liability will go for the lease. For example, if you are a sole proprietor, you are personally liable for every bit of the lease, and the landlord can go after your personal assets to receive payment. However, if your business is set up as a Limited Liability Company (LLC) or some forms of Corporations (and you are not required to sign the lease with a personal guarantee), your personal liability ends, short of taxes, when the company concludes.

Tenant Improvements & Betterments

When a tenant, even if at their own expense, adds fixtures or makes alterations, additions or installations that are a permanent part of the leased building or structure, those fixtures, additions, etc., may not legally be removed. These are considered tenant improvements and the assumption is that they add value to the property. For example, if you add a lighting fixture that is hardwired to the wall or from the ceiling, that fixture becomes the property of the landlord when you leave. The same thing applies to plumbing, HVAC systems you’ve added, bathroom fixtures, etc.

While regular fixtures attached to the property become part of the real estate, trade fixtures differ in that they may be removed from the premises (even if attached) at the end of the lease. In the salon and spa industry trade fixture may involve hair stations, reception desks, retail display, and fixtures such as dryers, or other treatment equipment specifically used in your trade. Some landlords may see some of or all of the additions as regular tenant improvements and may argue that you must leave them behind when you vacate the premises. To avoid any complications down the line, specifically, call out trade fixtures in your lease. However, be aware that the tenant must compensate the owner for any damages due to the removal of trade fixtures or repair such damage.

On the other side of the spectrum, a landlord may ask the renter to remove or replace certain tenant improvements should the owner deem them as damaged or unwanted. For example, if you altered the allocation of power for your salon, but the sockets do not work, you may have to pay to repair them. This stipulation also applies to improvements the landlord specifically added for you as an incentive for signing the lease.

Depending on the economy at the time and the supply of available real estate, it is not uncommon for a landlord to provide a certain amount of buildout or improvements as an incentive to signing the lease. For example, they may be willing to help cover some of the cost for addition or improved plumbing or power or will cover a limited amount of buildout (adding or removing internal non-load-bearing walls, upgrading bathroom fixtures, adding a kitchen, etc.). It would be wise to do your research ahead of time to know how much bargaining you might have in these areas. Also, do be aware that you may be required to remove specific landlord improvements when your lease ends, and you leave the premises.

The Small Print

Be sure to read all of the terms and conditions, sometimes known as the small print, carefully. Keep in mind that leases are written by the landlord and will always sway in their favor. Be sure that you fully understand what you are liable for, what you agree to, and what you get out of the deal. It’s advised to always consult with an attorney before signing a lease. They are in your favor; the landlord is not.