Six Tips for Negotiating a Commercial Lease

A commercial lease is a critical and important part of your business. The most important thing you can do is read your commercial lease thoroughly and completely take your time and understand each and every sentence. This accomplishes several things the first is it will help you to realize what benefits you have second it will assist you in understanding what responsibilities you have as a tenant and finally you can isolate any changes that need to be made to make you comfortable with terms and conditions.

In most cases the rent that you pay will be the second or third biggest expense for you business behind payroll and wages and the cost of producing your product. Negotiating a favorable lease places your business in the position to succeed. It is no secret that that a real estate lease agreement that the landlord is presenting is prepared by the landlord to favor the landlord. Your responsibility as a potential tenant is to read it completely, understand what it says, and then ask for modifications that will favor you.

1.  Location

Many have said that the most important thing about a business is location , location, and location. In many businesses e(especially retail) this is critical for the success of the business. Nut it is just as important for non retail business so be sure to check out traffic patterns, parking for staff and customers, ingress, egress, proximity to public transportation, proximity to freeways or major roads, noise and any other situation that has something to do with location. In selecting my office location not only did I look at these items I wanted something that was a short commute yet far away from my residence to make me feel like I was too close to work.2. Evaluate the Length of the Lease

2. Evaluate the Length of the Lease

Once you’ve located a commercial rental location, completed you may be asked to complete a commercial rental application, which is actually like applying for a real estate lease. That will allow the landlord to prepare real estate forms for your lease. The first key item will be to determine is the length of the lease. If you are just getting started a term of one to two years is may be best for many small businesses, in this case options to extend or renew will be important. One of the positives of a short term lease doesn’t tie you in for too long while options to extend provides an option to stay if it is a good fit. If you feel that you could easily find a comparable location, a shorter lease is better for you in case rents in your area go down or it turns out to be an unfavorable location. Always keep in mind that if your business is going to be very location-dependent (such as a restaurant), your business may be become a destination and therefore, so a longer term may make more sense.

  1. Research Comparable Rents

Obviously the rent you will pay is an important consideration in any lease agreement. Doing a little bit of homework to determine the costs are in your area is a must so spending some time in preparing in determining comparable rents will enable you negotiate a fair price. Keep in mind that you should also be aware that the length of a lease may have an impact on the rental rate per square foot. A key consideration of negotiating renewal options will be the specifics of rent increases so you won’t have any surprises ahead. Your landlord will likely want to increase the rent for each additional year and may ask for a minimum or maximum as well as cost of living increases based on consumer price indexes Push to work out a cap on these increases so it remains affordable for you to stay in the commercial real estate location. You can also negotiate the amount of your security deposit and the conditions for its return.

  1. Look for Hidden Costs

A lease may be a “gross lease,” in which all costs are included, or a “net lease” or a “triple net lease” in which there are costs incurred to manage and run the property will passed along to the tenant. Get the details on these costs for the last several years and negotiate this section to be as favorable as possible trying to eliminate certain costs from the calculation. Also make sure that the math is correct on your ratio of these common expenses. There may also be specific systems maintenance that you may be responsible for such as heating and air conditioning. Learn the current conditions of those systems from a professional and ask them to estimate your costs over the next several years Negotiate dollar amount caps to these costs or negotiate for a slightly higher rent in exchange for the landlord taking on all costs. Determine whether there are separate utility meters or if utilities are apportioned among tenants by square footage.

  1. Ask for Favorable Clauses

Ask for modifications to the lease that will benefit you. For example, a clause allowing you to sublease the property can be important should your business suddenly relocate or close. You may want to ask for a clause that restricts the landlord from renting out any other unit on the premises to a business similar to yours. A co-tenancy clause will allow you to break the lease if a large anchor tenant (which drives business to you) leaves. It is also possible to negotiate for the landlord to be responsible for making improvements to the property before you move in. Make sure you are permitted to put up signage for your business and determine the sign requirements and or restrictions.

  1. Check the Termination Clause Closely

Read the terms of your commercial property lease as it pertains to default and termination of the lease. You’ll want a clause that allows you time to cure a default before eviction, particularly one that allows you to pay one month’s rent instead of the entire amount owed on the lease. You will want to negotiate any penalties for early termination of the lease should you decide you need to leave before the lease term is up.