When considering a commercial lease, don’t just sign on the dotted line! For many businesses, leases are a large part of overhead. Tenants have bargaining power to garner for themselves the best deal for their bottom line. Here are some items you should consider when negotiating a commercial lease.
Identify your goals. Here are some important variables:
Size of the space in light of your needs (floor space vs storage space)
- The duration of the lease and your renewal rights
- Location, and the importance of a particular space for your business
- Total cost, including taxes, insurance and operating expenses
- Conditions on the lease, including signage, use, subleasing, etc.
Tip: Landlords can be persuaded to offer concessions to tenants in the form of rent reductions (free or reduced rent periods), improvements (the landlord will pay for certain renovations or repairs), renewal rights (tenant can add lease years to the overall lease term), expansion rights (the ability to grow), and fewer tenant obligations. Knowing your goals will allow you to ask for what you need.
Types of Leases
Leases are not made alike. Knowing the difference between lease types is central to any negotiation. Here are the three most common lease types:
- Gross lease: Tenant pays a set rental rate, and the landlord pays taxes, insurance and operating expenses. Because your property ownership obligations are lower, rent is typically higher.
- Triple net lease: Tenant pays taxes, insurance and maintenance in addition to monthly rent. In exchange for the higher level of building responsibility, the tenant’s monthly lease payment is usually lower.
- Modified gross lease: This is a “compromise” between a gross lease and triple net lease. Tenant pays the base rent plus a proportionate share of selected net expenses such as operating expenses, utilities, taxes and/or insurance.
Important Lease Terms
Commercial leases are long and complicated. Focus on big-ticket items first, but be sure to review all terms carefully to get the best deal.
- Rent: Make sure your business can afford the total payments, especially if rent increases over time. Understand your entire financial obligation (not just set rental rates).
- Terms: What is the duration of the lease? New businesses, for example, may seek a shorter term with optional renewals.
- Use and exclusivity: Make sure the landlord has no objection to your business purpose. In some cases, you can negotiate exclusivity to ensure your competition is not in the building or complex.
- Assignment: If you plan to assign or transfer the lease during the lease term, make sure that such assignment is allowed. Understand what expenses and liabilities carry forward with such transfer.
- Repairs: Understand who is responsible for what repairs. Structural or large mechanical repairs should be negotiated to the landlord.
There are dozens of other items that should be negotiated or considered when reviewing a commercial lease. Consider seeking advice from an attorney who is well equipped to handle these negotiations. You will save up-front negotiating costs over time because you have negotiated a better deal. After all, you will not receive what you want unless you ask for it.