Negotiating a Commercial Lease
By Anna Savino
One of the first important steps in opening a business is finding the right location because the success to any business is “location, location, location.” Business owners should investigate different areas to locate the appropriate location that will best fit the business’s needs and goals. Once the business owner settles on a location, business owners should contact landlords or leasing agents regarding the spaces he or she is interested in and ask for proposals. Owners are better equipped to feel out the area and know which provisions are more comparable and negotiable to the spaces in the area if the lessee receives multiple proposals to different locations. Some leases may be short and fairly easy to comprehend, while others are very lengthy and seem daunting.
The most common and negotiable terms included in a commercial lease include:
1. Term of Lease: The term, or the length, is a key provision in a lease. A long-term lease allows for more stability because the lessee is guaranteed the space for a predictable period of time. If the lessee finds a location that is favorable to the lessee’s business or if the business does well, the lessee will want to stay at the location for a longer period of time. On the other hand, signing a short-term lease may be more favorable in case the business flops and the lessee will not need a space for a long period of time. A short-term lease may be more beneficial to lessees because a short-term lease gives lessees more flexibility if the business needs change.
One solution to determining how long of a lease to enter into is to negotiate for a short initial lease with one or more options to renew the lease for a longer period.
2. Rent: Another primary issue in lease negotiations is how much to pay for rent. Rent on commercial spaces is usually calculated per square foot or as a percentage of gross sales. Obtaining multiple lease proposals allows lessees to calculate a reasonable and comparable rate. Leases usually include annual rent increases, which may be a specified price, a fair market value, a percent of the current rent or some other formula.
A landlord may want a higher rent for the renewal period in an option to renew provision. Just as in the increase in the base rent, the increase in rent during the option period may take the form of a fixed rate, market value at the time of renewal, a percentage of the current rent or another formula. Negotiating the rental increase for the option period before signing the initial lease is important because the lessee could be hit with a large rent increase without warning when he or she exercises the option to renew if does not negotiate the increase.
3. Maintenance Fees & Utilities: Lessees are normally responsible for maintaining all equipment and utilities serving the space. Lessees should be weary of how these charges are measured – individually metered or apportioned by square footage.
4. Tenant Improvements: Occasionally, the space may need to be altered to better fit the business’s needs. Lessees can negotiate to have the landlord provide the improvements at no cost to the lessee, provided they agree to another provision, such as a longer term. Lessees may also negotiate for lower rent during the time the necessary changes are made to the space.
5. Subleases and Assignments: Some leases include a provision, which allows lessees to sublet or assign the space, others may require a landlord to permit the lessee to sublet or assign the space and others will not include such a provision at all. Lessees should negotiate for the right to sublease or assign the space because if the lessee needs to leave the space for any reason, he or she will be able to have another tenant take over the space and pay rent without breaching the lease.
6. Exclusivity Clause: An exclusivity clause prevents landlords from leasing another space on the premises to a direct competitor. A lessee should negotiate for this provision to be included in the lease if exclusivity is important to a lessee.
Leases also include, but are not limited to other provisions such as security deposit, insurance, alternative dispute resolution, and governing law. Lessees must realize the importance of each and every provision of the lease and negotiating terms that are favorable to the needs of their business.
Lessees should have an attorney review the lease to point out potential risks. When selecting and negotiating leases, business owners may deal directly with landlords, a leasing agent, shopping center manager, or large corporations. Our attorneys have experience in negotiating many different types of commercial leases and dealing with different leasing agents. After reading and reviewing the lease, our attorneys will sit down with the lessee to discuss potential negotiations points and submit a counter-offer in writing. Our attorneys are dedicated to helping lessees get the best deal possible so their business can grow and flourish.