The Importance of Leasing a Commercial Space
In general, leasing a commercial space instead of committing yourself to owning commercial real estate can be an excellent move, but there are fewer tenant-friendly laws and no standard lease agreements. You may need a real estate lawyer’s help to negotiate the best deal on a commercial lease.
Leasing a office is likely to be upon your firm's biggest expenses. So, naturally, you'll want to negotiate the best possible terms.
Despite what landlords may tell you, there is no “standard” commercial lease. But some common sticking points tend to show up in most negotiations. Before committing to any lease, you will want to keep the following issues in mind:
- How much rent is due, including any increases (called escalations). You'll want to know the going rate for space in the neighborhood before you begin negotiating. It also helps to let the landlord make the first offer, and ask for a lower rent than you think you can initially get. Escalations should be for specific dollar amounts or tied to a known method of calculation, such as cost of living indexes.
- How long the lease runs, when it begins, and under what conditions you can renew the lease. A shorter lease means less commitment, but less predictability for the long run. If location is very important — for example, if you have a retail store — you may want to opt for a longer lease. You can always attempt to negotiate lower rents or improvements as time goes on. If you have a month-to-month lease, you'll want to make sure the landlord gives you as much time as possible when terminating the lease.
- Whether your rent includes utilities, such as phone, electricity, and water, or whether you'll be charged for these items separately.
- Whether you'll be responsible for paying any of the landlord’s maintenance expenses, property taxes, or insurance costs, and if so, how they'll be calculated.
- Any required deposit and whether you can use a letter of credit instead of cash.
- A description of the space you’re renting, square footage, available parking, and other amenities.
- A detailed listing of any improvements the landlord will make to the space before you move in. Your landlord may be more willing to make lots of expensive improvements if you’re signing a longer lease.
- Any representations made to you by the landlord or leasing agent, such as amount of foot traffic, average utility costs, restrictions on the landlord renting to competitors (such as in a shopping mall), compliance with Americans With Disabilities Act (ADA) requirements, and so forth. These may come in handy later when you want to renegotiate your lease.
- Assurances that the space is zoned appropriately for your type of business. Of course, you'll also want to check out this information with local zoning authorities.
- Whether you'll be able to sublease or assign the lease to someone else, and if so, under what conditions. You'll want to negotiate the ability to sublease so that you can move with as little financial pain as possible.
- How either you or the landlord can terminate the lease and the consequences.
Renegotiating the Lease
When it comes time to renegotiate your commercial lease, you'll want to document your reasons for a lower rent or more space improvements with hard facts regarding lower foot traffic than represented, a downturn in your industry, and so forth. Some landlords will even be willing to take a percentage of your sales instead of a flat rental fee when economic times are slow.
The Bottom Line
As a tenant, you have far more leeway when negotiating a commercial lease rather than with a residential lease, which is one reason why having your own lawyer to represent you in negotiations is so important. A Land Use and Zoning attorney can also research zoning laws and local ordinances and fill you in on the local real estate market conditions and customs.