Renting commercial real estate is an important part of most businesses as it’s going to be one of your most expensive monthly expenses. Because of that negotiating a favorable lease is going to put your business in a better position to succeed. Commercial real estate lease agreements are prepared by landlords which means the contract favors the landlord. As a tenant it’s important that you read the entire commercial lease contract, understand what everything means and how it impacts your business, and then negotiate to make it more favorable to you. Below are a few tips to get you started however keep in mind there are many more things that can be negotiated in a commercial lease.
- Research Comparable Rents in Your Desired Area – It’s important to know what rental rates other comparable buildings are quoting. Do some homework and find out what market rates are. This will ensure you are able to negotiate a fair price. If you have a commercial real estate agent representing you then have them do this for you as it will save you a ton of time and money. You will also want to make sure you try to minimize or cap the amount of yearly rent increases so you don’t have any future surprises.
- Negotiate the Lease Term Length – Most landlords prefer to have 3-5 year leases and in some cases they will stick to that especially in a hot market. If you are an established profitable business you should be ok with this as you will be able to negotiate more concessions. Also if your business is location dependent like some commercial retail spaces or medical office space then a longer term lease is preferred. However if you are a small startup business then you may want to only look at buildings that are ok with 1-2 year leases. Just make sure to try to negotiate a renewal option.
- Know Your Total Costs – Some leases are gross leases and some are called triple net commercial leases (NNN). It can be confusing however in the end it’s important that you know what the total monthly and yearly costs are. What costs is the landlord responsible for and which costs are you responsible for. It’s important that you get all the details on these costs and negotiate caps on certain costs and make them as favorable as possible.
- Request Clauses to be in Your Favor – For example ask for the right to sublease to another company in the event your business doesn’t work out or you grow faster than planned and need to relocate. If you rent medical office space or lease retail space you might want to ask for a non-compete clause so the landlord is not able to lease commercial space to any company similar to yours. You can also ask for a terminate clause in the event the large anchor tenant leaves the project.
- Check the Default Clauses – Make sure to thoroughly read the section of the lease that pertains to default. You may not have any plans to default however you never know. You want to ensure that you negotiate some time to cure defaults (e.g. you are late on rent payments or you exceed your parking ratio)
While you may have your commercial real estate broker and attorney review the commercial lease it’s important that you read it also. The most important thing you can do is read it, and make sure you understand all the clauses and how they could potentially impact your business. If you understand it then you will have the knowledge to effectively negotiate the commercial lease.