Negotiating a Lease for Commercial Real Estate
There is no standard agreement for commercial leases. In fact, negotiating the terms of commercial leases is usually expected. Depending on the state of the commercial real estate market, a business may be able to obtain significant concessions from a landlord. A property owner with a largely vacant business park, for example, will most likely make allowances.
On the other hand, the business renting the space will have less control over the terms of a lease in a hot rental market or when renting a premium space. Consider the following when negotiating a commercial lease.
Rent and Rent Increases
Consider the cost of rent before leasing commercial property. Depending on factors such as market conditions and the location of the property, it may be possible to negotiate the rental amount. A landlord typically calculates the cost of rent by multiplying the square footage of the space by the cost per square foot. The result is the annual cost, which is divided by 12 months. The landlord may also include the cost of maintaining the common areas into the rental amount.
Other costs associated with the property may be included in the rent calculation. The lease will define whether the landlord or the business tenant must pay for other costs, such as utilities, insurance, taxes, and repairs. These terms may not be negotiable.
- Gross lease: The landlord pays for utilities, insurance, taxes, and repairs. Rent is usually higher with this type of lease because many of these costs are included, but the tenant will pay the same amount each month.
- Net lease: The tenant pays the rent amount and pays for utilities, insurance, taxes, and repairs.
- Double net lease: The tenant pays the rent amount and pays the landlord for insurance and property taxes.
- Triple net lease: The tenant pays the rent amount and pays the landlord for the cost of utilities, insurance, taxes, and repairs.
An annual rent increase clause is typically included in a lease. Many landlords base rent increases on a percentage. Ask the landlord to give a one or two year grace period and request a cap on the yearly percentage increase.
Length of Lease
Negotiating the length, or "term," of a lease is important. A landlord will typically make more concessions for a tenant that agrees to a long-term lease. This is because it eliminates the need and expense of re-leasing the property and it ensures the receipt of steady income from the rental.
A long-term lease may not work for every tenant. The desired term will usually depend on how the tenant will use the space. When location is an important factor, a business may want to negotiate a longer term if the property is in a great location. Although a long-term lease will ensure that the business can remain in the space for a certain amount of time, it will also make the business responsible for paying the rent regardless of whether it succeeds or fails or whether the business must relocate to accommodate new needs. For a business that just needs office space, the length of the lease will be of less importance since location is inconsequential.
Although most landlords prefer long-term lease agreements, it may be possible to negotiate a short-term lease with a renewal option. With this arrangement, the tenant will have the right to exercise the renewal option within a certain time. Ask the landlord for an option that provides a predetermined price. A landlord may charge higher rent and a fee for this option.
It may be necessary to make improvements to a space to make it functional and appealing to customers. A landlord may be willing to negotiate who pays for needed improvements. Alterations, renovations, or remodels of a property for a tenant are often called "build-outs."
Negotiating for build-out usually entails resolving the following issues: what improvements will be made, which party will pay for the improvement, which party is in charge of having the work performed, and will the tenant need to restore the space to its original condition when moving out.
Most commercial leases will include terms about the permitted use for the space. It is beneficial to negotiate broad usage terms just in case the business expands or another tenant sublets the space.
Subleases and Assignments
Negotiating the right to sublet or assign a lease to another tenant is a good business strategy. If the business fails or it is necessary to move to another location, the ability to assign the lease or sublet the space to another tenant will prevent being locked into an agreement without the ability to offset costs.