Leasing commercial space for a place of business is one of the largest expenses incurred by a new or expanding company, so it is important to do your research and preparation. Here are some tips from the Small Business Administration for negotiating a commercial lease for your business.
You should seriously consider working with a broker to help you negotiate with the landlord. It is also important to consult a knowledgeable real estate lawyer; they can often recommend the right choice for you and protect your interests as you negotiate your lease through the broker.
Study the Lease Agreement
Lease term and rent are your first negotiation points. It is generally recommended that small businesses negotiate one- to two-year leases with the option to renew. You will also want to factor in rent increases over the term and renewal options so you are not charged with an unexpected rent increase without warning.
In addition to your monthly lease payment, find out what expenses you may incur beyond rent. Commercial real estate landlords often incorporate extra expenses into the lease such as maintenance fees, upkeep for shared facilities (Common Area Maintenance or CAM), etc. Other expenses to consider are utilities. These charges are usually the responsibility of the tenant, so find out how these are measured. Are they individually metered or apportioned by square footage? Ask to see these “hidden fees” and policies as well as examples of costs that are typically incurred by tenants.
Maintenance and Repair
While residential leasing often places the burden of maintenance and upkeep on the shoulders of the landlord, commercial leases are different. Commercial leases vary regarding maintenance and repair – some stipulate that the tenant is responsible for all property upkeep and repairs while others specify that the tenant is responsible for systems like air conditioning, plumbing, etc.
Read the Lease
Be sure to read over your lease in detail and hire an attorney who specializes in commercial real estate to walk you through the clauses and fine print.
Protect Your Business
To protect your investment and long-term business interests, it is worth investigating and negotiating some potential add-on clauses to your lease. These might include:
- Sublease: This builds in some flexibility, allowing you to sublet your space to another business.
- Exclusivity clause: Prevents the landlord from leasing other spaces on the property to a direct competitor of yours.
- Co-tenancy: If the property’s anchor tenant closes business, a co-tenancy agreement can protect you from a potential loss of customers, allowing you to break the lease if the landlord does not replace the anchor tenant in a specified time period.
What if You Default?
Should you default on your lease payments, there are steps you can take during the lease negotiation process to protect yourself. Find out what the lease agreement states. Will you be locked out immediately? Will the landlord initiate eviction proceedings? Can you negotiate more time? Could you pay only the current month’s rent instead of the remaining amount owed on the lease? All of these issues should be addressed in the lease agreement.