Commercial Lease Negotiation Checklist

In many states, commercial leases are not covered under consumer protection laws that normally safeguard tenant rights. It is assumed that commercial leases are contracts between knowledgeable business people, and therefore less government regulation is needed than in residential leases. Thus it is essential to scrutinize every aspect of the lease and negotiate unfavorable terms before signing.

Non-Compete Clause

If you run a retail establishment, insist upon a provision that prohibits the landlord from renting space in or near the same retail center to a competitor.

Dispute Resolution

If there is a dispute involving you and the leaser, by what method will it be resolved? Negotiating for mediation or arbitration rather than regular court is usually advantageous.

Spatial Specifications

Exactly how much space is being rented, and which areas are included? It is wise to take a tape measure and confirm the leaser's measurements, as they are often exaggerated. Finding a discrepancy in reported space and actual space is a valuable bargaining tool. Do you have the right to move to another space in the complex if you need more room to expand?

Default and Termination

Under what conditions can either party free themselves from the lease and what notice requirements are needed?

Pets

In an effort to attract skilled employees, more employers are allowing pets in the workplace. Will the leaser permit pets in the space?

Rent

Prices are always negotiable in commercial leases, and may depend greatly on concessions made with regard to other aspects of the lease as well as general market conditions. If options to renew are considered, what rent increases are allowable, and how are they calculated?

Additional Costs

The cost of utilities, taxes, and maintenance are often passed on to the tenant. If you agree to pay them, make certain that your portion is in line with the percentage of the building that you occupy.

Buildouts

Improvements, modifications, and fixtures added to a rental space are called buildouts. Negotiation should include whether these are allowed, which party will pay for them, and who owns them after the lease ends.

Sublease

The term "sublease" refers to a transfer of less than the entire term of the lease. Under a sublease, the subtenant is not directly responsible to the leaser, whose recourse against the subtenant is only through the original tenant. If your business fails or the location doesn't match your needs, do you have the leaser's permission to sublet the space to another party?

Term Options

Many new businesses negotiate a short initial lease with one or more options to renew. Options give you the right to stay by notifying your landlord in writing a certain number of days or months before the lease expires. Landlords may want a higher rent for the renewal period as well as an extra fee in exchange for the option.

Leasing Pitfalls

The following factors may adversely affect the tax status of your leases:

  • Rental payments that establish equity or lead to a property title,
  • Rental payments that exceed the fair rental value of the property by a wide margin,
  • Rental payments that are actually the equivalent of interest on a purchase, and
  • When, subsequent to the end of the lease, the option to purchase is exercised at a rate that is quite low in comparison to the actual property value.

 

Next Steps

Your commercial rental agreement (or lease) governs the entire rental relationship. This includes the amount of rent and how to pay it, what each party’s duties are, and what to do if either party fails to perform. Given how important the lease is to both parties, landlords and tenants must educate themselves on the various terms that could prove quite consequential.