Important Commercial Lease Terms to Negotiate
Commercial leases are a significant undertaking as well as a significant part of business expenses. As such, it is important to know which lease terms are important and how to negotiate these terms to your advantage. Commercial real estate leases are prepared by landlords and their attorneys which usually means the contract is going to be in the landlord’s favor. Therefore it is important to know which terms one can really negotiate, and how, in order to get the most value. Read the entire contract and if you don’t understand it enlist the help of a lawyer or real estate professional.
Comparable Rents– It is of utmost importance for you or a commercial real estate agent to know what buildings of similar value in the area are charging for rents. Knowing market rates is a powerful negotiating tool to get to a fair price. This alone can save a lot of time and money. You should be aware of any rent increases in the lease as well and try to minimize them to avoid unforeseen future expenses.
Lease Term Length- Depending on your business history and type of business, desired lease lengths can vary. Most landlords prefer to have 3-5 year leases especially in active markets. If you have an established business this should be ok as you should be able to get more concessions from the landlord given the term and business strength. This longer term is also preferred if your business is location dependent such as a retail or medical space. If you are a newer business just starting out, you may want a shorter 1-2 year lease with a renewal clause.
Lease Total Costs- Some leases are gross leases and some are triple net (NNN). These different types of leases determine who’s responsible for paying what. This can be confusing so it’s important to know exactly whos responsible for which charges. It’s important to get all the details on these costs (i.e. electric, maintenance, property taxes) to understand who’s responsible and how to best negotiate or cap these costs.
Request Certain Favorable Clauses- You may want to negotiate certain clauses in the event that your business does’nt work out or you are growing faster than expected. For example a clause with the right to sublease the space if you outgrow it or need to relocate. If you have retail or medical space, you may want to put a non-compete clause in so that a competitor doesn’t move in next door to you and hurt your business. You may also want to ask for a termination clause in the case (for example) that a large anchor tenant leaves and hurts your business traffic.
Inspect Default Clauses- Lastly, always make sure to inspect the part of the lease that deals with defaults. In the event you cannot make rent payments, you should have some type of recourse or time period to make it right without a penalty. Things such as “good guy” clauses pertain to this and should be looked over.
It’s important for not only a broker/attorney to look over this but you as a business professional to become totally familiar with the lease and all its terms and clauses. It’s in your best financial interest as lease expenses are a significant portion of a company’s overhead.