Commercial Leases
Leasing a commercial office space is one of the largest expenses made by new and expanding businesses. Commercial leases are often negotiated and there is no standard for commercial leases. It's recommended that you get a lawyer's help to make sure you get the best deal.
Every commercial lease should be in writing and include the following details:
- Rent, including any increases (called escalations)
- Length of the lease
- Conditions under which the lease may be renewed
- Whether or not the tenant is responsible for paying utilities, such as phone, electricity, and water
- Whether or not the tenant is 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
- 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 requirements, etc.
- Assurances that the space is zoned appropriately for your type of business
- Ability to sublease or assign the lease to someone else, and if so, under what conditions.
- How either tenant or the landlord can terminate the lease and the consequences.
Before you start negotiating
- Research the going rate for office space in the neighborhood, and talk with other tenants in the area. This will help determine your negotiating price.
- Have a good idea of realistic escalations. Escalations should be for specific dollar amounts or tied to a known method of calculation, such as consumer price (cost of living) indexes.
- Keep in mind that a shorter less means less commitment for you, but less predictability for the property owner. Going with a longer lease gives you more negotiating power, but you'll want to be certain you've carefully considered your location. You may want to be prepare to negotiate lower rents for a longer commitment. 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. Also, your landlord may be more willing to make lots of expensive improvements if you're signing a longer lease.
- Consider negotiating reduction in rent payments for improvements you agree to make to the property.
- Check with your local zoning authority to make sure the property is properly zoned for your type of business.
Finally, you should definitely negotiate the ability to sublease so if the location is not working out, you can move with as little financial pain as possible.
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.
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 lawyer can also research zoning laws and local ordinances and fill you in on the local real estate market conditions and customs.