Negotiating a Lease for Commercial Real Estate
Commercial leases are the starting point for many small businesses. Negotiating lease terms for a commercial space can be a make-or-break deal for a startup with little operating capital. Negotiation is a part of sitting down with a property owner to write a commercial lease agreement.
Most small-business owners have little experience in the lease negotiation process. Like most of us, they're familiar with standard residential rentals. An apartment rental is non-negotiable. You pay the listed price or find another place. Commercial lease negotiations have many more options and negotiation points. A commercial property owner wants to lease the property and is willing to make concessions to a prospective tenant.
If you're unfamiliar with commercial lease terms and leasing options, consider having a business attorney assist you during the negotiations. Read on to learn how an attorney's services can help secure the ideal business lease.
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Rent and Rent Increases
The monthly rent in a commercial lease is the base rent. Base rent is the cost per square foot multiplied by the square footage of the rental space. In a commercial real estate lease, the landlord may list an office space as the rental property but include the hallway or stairwell space as part of the rental square footage. An attorney can help spot these discrepancies and use them for negotiation points.
Other rental costs include utilities, property taxes, building insurance, and maintenance. The tenants share responsibility for common area maintenance (CAM), such as lobbies, exterior landscaping, and bathrooms. The landlord may pay for building maintenance or include it in the lease. There are three categories of additional costs a landlord may add or "pass-through" to the tenants in a lease.
- Gross Lease: The tenant pays only the base rent. The landlord bears all other costs and responsibilities. With this type of lease, the base rent may be higher, but there are no other costs to the tenant.
- Net Lease: The lease payment includes the base rent plus one of the categories (tax, maintenance, or insurance).
- Double Net Lease: The tenant pays the base rent plus two categories.
- Triple Net Lease: The tenant pays the base rent and all three categories of additional costs. Triple net leases are most common in longer leases.
Net leases are essentially property ownership without title. The reduction in rent must be great enough to offset the costs of maintenance and taxes. In a long-term triple net lease, the lessee is often a whole-building lessee who will sublet the property and manage the building for the owner and lessor.
Some landlords use external indicators like the Consumer Price Index (CPI) for commercial property rent increases. Other property owners use the local real estate market as a comparison or use a fixed-rate percentage. You may prefer a dollar amount or an annual percentage. This is another point of negotiation where a real estate lawyer can be invaluable.
Length of Lease
Negotiating the length or term of the lease is important. A new or startup business may want a shorter lease in case things don't work out — or in case they do, and the business needs bigger quarters sooner than the owners hoped. On the other hand, landlords may make more concessions to tenants who agree to long-term leases. A long-term tenancy ensures a steady income for the landlord and eliminates the need to lease the property again.
If you like the location but aren't sure you want a long-term lease, ask about renewal options. A short-term lease with an option to extend is a possible counteroffer to a landlord who only wants a long-term tenant.
Any rental needs some improvements functional for the new tenant. The landlord may negotiate needed improvements or alterations for the property before the tenant moves in. These are known as build-outs. Build-out negotiations involve who will pay for the materials and labor and whether the tenant must restore the property to its original condition on leaving.
The lease should have a separate clause on tenant improvements during occupancy. The landlord may restrict tenant improvements or renovations to longer-term or triple-net leases. You should ensure that any improvements you make to the building are not included in maintenance or repair costs. If the alterations increase the property value, tenants should receive a benefit in the rent payments.
Property leases should include terms about the permitted use of the space. Zoning regulations may determine the property use, so these terms may be non-negotiable. Your attorney can advise you about which property use terms are flexible and which are fixed by law.
You should negotiate the broadest terms possible for your business in case of unforeseen expansions or future uses.
Subleases and Assignments
Like a residential lease, commercial lease tenants can sometimes sublet or assign their lease if the landlord allows it. With a long-term lease, the ability to sublet or assign your lease can protect you if you need to relocate before the end of your lease term. You can sublet the space to another tenant rather than break your lease or pay double rent for the remaining term.
Termination and Move-Out
No matter how long the lease term is, your lease agreement should have a termination clause and move-out terms. If you paid a security deposit, the landlord may have been collecting interest. In some states, the tenant receives the interest or a month's free rent as an offset. Your attorney can advise you about the laws in your state regarding commercial security deposits and final rent.
Fixtures and improvements in commercial buildings should be mentioned in the lease. For instance, a restaurant may have spent thousands of dollars installing kitchen appliances when the business vacates. It must be clear by the terms of the lease whether these fixtures are part of the property or belong to the business.
Have Lease Negotiation Questions? An Attorney Can Help
You may be a savvy business entrepreneur, but the legal world can be tricky. Speak with a small business attorney in your state to help you understand real estate terminology and review the lease before you sign it.
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.