THINGS TO CONSIDER BEFORE NEGOTIATING A COMMERCIAL LEASE
Updated: Mar 8, 2021
When it comes to negotiating a commercial lease, excitement can sometimes get the better of us. A commercial lease is a big commitment, lasting anywhere from 5 or 10, to sometimes even 20 years. Because most businesses will not have the same needs in 5 years, much less 20, there are a lot of considerations savvy business owners and their lawyers need to take into account before signing on the dotted line. Here are some things to consider before negotiating a commercial lease.
Thinking of signing a commercial lease? Depending on whether you’re a landlord or a tenant, your business considerations will likely vary. You’ll want to carefully assess your business model to ensure you land the right lease for your business. For Tenants: Assessing costs should be your priority. Consider the rental rate. Does it make sense given your business model? Have you factored in all non-rental charges? These can include CAM (Common Area Maintenance) charges, taxes, and insurance, and can add up quickly. Not to mention, the location of your business can have a huge impact on who comes through your door (if walk-in traffic is a big part of your business). For Landlords: A landlord’s priority is the tenant’s reliability and ability to pay what they owe. Consequently, a landlord should assess the tenant’s track record to determine if they are qualified and trustworthy. This may include requesting audit rights over their financials, or a personal guarantee from one of the business owners.
Site considerations, much like business considerations, differ for tenants and landlords. They are a critical element of negotiating a commercial lease, especially when it comes to the renovations required to get it ready for use.
For Tenants: As commercial tenants know, location and space can make or break your business. Inspecting the site’s suitability in terms of size and condition should be at the top of any commercial tenant’s list. Take time to assess the property’s condition. Ensure the property is permitted for commercial use and the space plan suits your business’s needs. As most commercial spaces will require some work to get them ready for opening day, it’s important that you understand the process of getting work changes reviewed and approved by the landlord, in addition to determining who will be responsible for the costs. In some instances, a landlord may contribute toward the “build-out” of the space. If this is the case, it’s essential that you determine the process for obtaining contribution from the landlord and when you can expect to be paid back for any costs you incur. Finally, be sure to determine who owns any alterations and improvements you make to the site.
For Landlords: When it comes to site considerations, you should think about how the tenant’s business will impact other tenants at the property. Consider the following questions:
Is the tenant asking for an exclusive agreement and how does that impact your rights? An exclusive means that no other tenant can operate that type of business, and applies mostly to retail leases.The language of any exclusive should be scrutinized to ensure it’s not too broad or too restrictive.
How does the proposed use affect other tenants?
How does the tenant’s proposed use fit with the property?
There are many deadlines in leases, as well as certain events that trigger other events. Clearly specifying those deadlines and event triggers is crucial in negotiating a good lease. For example:
When does the rent payment begin and how does that relate to any build-out?
When does the security deposit/first month’s rent get paid and how does it get returned?
How does the tenant exercise any renewal options?
What is the process in the event of a lease default?
After you’ve done your due diligence, taking business, site and logistical needs into consideration, consider engaging an attorney to help you seal the deal. Discussing your options with a qualified lawyer such as Downs Law LLC can help ensure you negotiate a commercial lease that meets all your business needs.