How to Negotiate a Better Commercial Lease
Among your company’s biggest expenses, your payments for office or retail space probably rank near the top. So, naturally, you’ll want to negotiate the best possible terms [PDF].
Despite what landlords may tell you, there is no “standard” commercial lease. But some common “sticking points” crop up in most negotiations. Before committing to any lease, you’ll want to ask — and weigh the answers to — the following questions.
Limitations on Your Use of the Space?
Many leases include a list or description of the activities the landlord will allow in the space. Even if you plan to use the space for a single purpose, it’s advantageous to have a lease that allows for a wide range of uses, in case your business changes or a new opportunity arises. If you can, get the landlord to agree to language such as “for all legal uses” in your lease.
While you’re discussing this, determine exactly how much space you’re permitted to use. Remember that “usable square footage” is significantly less than “rentable square footage” (which often includes hallways, stairs and elevators, lobbies, bathrooms, and other space in which you can’t readily set up shop).
How Long Can You Stay, and How Much Will It Cost You?
Most landlords are willing to provide better terms on longer leases. But as a tenant, you probably want the flexibility to stay or go, or to renegotiate the lease, relatively often. A good compromise is a two-year term with three or four options to renew. If you can’t agree on renewals at the original rent price, try to limit renewal rent increases to a stable “cost of living” or “inflation” index (more on this below).
Don’t sign a lease allowing renewal at the “fair market” rent price. Landlords get that from brand-new tenants, so you’ll be getting no preferential treatment for the years you will have been a stable tenant.
Landlords may grant concessions at the start of a lease — such as free rent or help building-out the space — but later they’ll want more money. You get some protection by having all rent increases limited to the Consumer Price Index or another inflation escalator, even more from a fixed-dollar or a fixed-percentage limit.
Can’t negotiate limits on a lease’s automatic rent increases? You may end up moving to new premises sooner than you hope if market rents drop below what you’d pay under your current lease.
How Expensive Are “Extras” in Your Lease?
Don’t get so excited by the low rent you’ve negotiated that you forget to factor in the additional costs of any operating expenses you must pay. If your lease saddles you with a share — or the full cost — of cleaning, security, utilities, climate control, maintenance, repairs, and/or “after-hours services,” your cheap rent may turn out to be very “dear.”
A good tenant strategy is to negotiate limits on the maximum amounts you must pay for any such extras.
Who Pays for Necessary Improvements and End-of-Lease Restoration?
Unless you’re lucky enough to find a space that’s tailor-made for your business’s requirements, you’ll want to anticipate a need for improvements. These updates may include paint, carpeting, new walls or doors, custom counters, worktables, specialized task lighting, and so forth. A good lease gives you permission to make necessary changes and specifies who pays for each one.
While negotiating a lease, work to delete any requirement that you must relinquish the premises in their original condition. Ask for specific language that exempts you from paying for ordinary wear and tear, damage by casualty loss (such as a fire or a break-in), and restoration after landlord-approved alterations.
Can You Share Your Space or Vacate Early?
“Assignments” and “sublets” are technical lease terms that can become critical if your business does not grow as fast or as profitably as you plan. Ideally, that won’t happen. But if it does, you want enough flexibility in your lease so that you can share your space or even sublease it all to another tenant, whenever you wish.
Some strict leases actually regard any change in the ownership of your company — even additional investors as a result of its success — as an impermissible “assignment” or “sublet” of the space. Those are the types of leases to avoid.
Are You Benefiting From First Refusal and First Offer Rights?
These terms apply to other spaces in the same building or complex. “First refusal” means that you
get first dibs on new space there, under the same terms the landlord would offer to any other prospective tenant. “First offer” means the landlord can’t put another tenant into a space unless you don’t want it.
These agreements may prove useful if you’re looking to move to a better spot or take over additional space. If you’re not, they can be valuable bargaining chips that you can negotiate away in exchange for another lease provision you want more.
Bear in mind that these guidelines are easier to follow in renters’ markets. But, in any case, it’s dangerous to sign a lease with potential costs and limitations that may harm your ability to do business. If a prospective landlord won’t yield on an important matter or makes unreasonable requests, keep looking.