Having a favorable commercial lease is an important step to ensuring your businesses success. Negotiating favorable lease terms for your business gives your business the greatest chance of success. Often the difference between a successful business and one that fails are the terms that govern their commercial lease. For most small businesses the two largest costs they experience in operating are their lease commitment and payroll. Remember that a commercial lease agreement is typically prepared by the landlord’s attorney to favor the landlord. Your responsibility as a potential tenant is to read it completely, have your lawyer review it, make sure that you understand what it says, that the lease terms are acceptable to you, and if necessary to negotiate modifications of the lease that will favor your business.
When negotiating a commercial lease there are a few things that every business owner needs to remember.
Once you’ve identified a location for your business, and have submitted the necessary information to the landlord to apply for the commercial lease (typically a personal financial statement, business balance sheet and abstract about your business), the landlord you will send you a draft lease to review. One of the first issues you need to work out is the length of the lease. A term of three to five years is usually best for small businesses. If you are interested in a longer lease term, you can always negotiate a right to renew the lease for a longer period of time, typically in five year increments. This type of lease provision doesn’t tie you into the space for too long but gives you the option to stay if determine the location is a good fit for your business. If you think that you could easily find a comparable alternative location, a shorter lease term is better for you in the event that rents in your area go down, or if the location doesn’t meet your business needs. In the alternative, However, if your business is very location-dependent (such as a restaurant, bar or retail store), you will want the additional security that a longer lease term provides.
The amount of rent you will pay is an important consideration in a commercial lease agreement. Do your homework and know what the going costs are in your area so you can negotiate a fair price. Part of negotiating renewal options with your landlord includes specifying rent increases so you won’t have any surprises ahead. Your landlord will likely want to increase the rent for each additional year. This is called rent escalations, and can be a fixed amount or a percentage over a base year amount. Try 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.
When you review your lease confirm if your lease is a “gross lease,” in which all costs are included, or a “net lease” in which there are costs in addition to your rent. Most commercial leases make the tenant shoulder for costs such as maintenance or upkeep of common areas in addition to the base rent. Get the details on these at the outset of your lease negotiations and negotiate this section to be as favorable as possible. Find out if your business will be responsible for specific systems maintenance and learn the current conditions of those systems so you can estimate costs. For instance, if you landlord intends for the tenant to be responsible for HVAC, or other mechanical systems that service the space find out how old those systems are, when they were last services, and when the are projected to need to be replaced. If possible, try to negotiate a cap on these costs or negotiate for a slightly higher rent in exchange for the landlord being responsible for these costs. Remember having a predicable rent is critical to your businesses success. We want to try to avoid if at all possible unexpected expenses to your business. Determine whether there are separate utility meters or if utilities are apportioned among tenants by square footage.
When reviewing your lease, identify modifications to the lease that will benefit you. Make a list and prioritize them modifications from most important to least important. For example, a clause allowing you to sublease the property can be important should your business need to relocate or close. Likewise, you may want to consider the inclusion of a clause that restricts the landlord from leasing any other unit on the premises to a competing business. For example, if you operate a hair salon, that your landlord is prohibited from renting another space in their shopping center to another hair salon. Likewise, a co-tenancy clause will permit you to break your lease agreement if a large anchor tenant leaves the premises. For example, if you operate a pizzeria and a large number of your customers come from the movie theater next door. If the theater closes you have the option to terminate your lease agreement. It is also a good idea, to negotiate for the landlord to be responsible for making improvements to the property before you move in. You should make a list of the improvements that you would like for the landlord to make and prioritize them. In some cases the landlord, will give a tenant free rent or partial rent in order for the tenant to make the improvements to the property. These tenant improvement dollars can be very helpful in getting your space exactly the way you want it. Finally, make sure your lease provides that you are permitted to put up adequate signage for your business so that customers can easily identify and locate your business.
When you are negotiating your commercial lease agreement it is particularly important to review the terms of your lease that govern default and termination of the lease. You should make sure to be familiar with what constitutes and incident of default by the tenant and an incident of default by the landlord. Make sure that the lease agreement contains a clause that permits you sufficient time to cure a default before eviction. 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.
The most important thing you can do is read your commercial lease carefully and understand it completely. This allows you to realize what benefits you have so you can ask for changes and it also prepares you for your responsibilities as a tenant.
To talk with one of our experienced real estate attorneys about about negotiating a commercial lease agreement, contact Antonoplos & Associates Attorneys At Law at 202-803-5676 or on the web at www.Antonlegal.com.