Leasing commercial office space is often the largest expense for a small business. And if you agree to suboptimal terms, your lease could put you out of business. Here’s what entrepreneurs should know to protect themselves before leasing commercial property.
How Commercial Leases Differ from Residential Leases
When leasing commercial property, first understand the differences from leasing residential property. Business tenants have fewer protections, but more flexibility to negotiate terms.
- Fewer consumer protections. The assumption behind leasing commercial property is the business and landlord are relatively equal in power. Thus, there are no guaranteed security deposit caps, repair obligations or eviction and privacy protections. Commercial leases are also much more difficult to break.
- Non-standard leases. Landlords mold commercial leases to meet their needs — there are no standard arrangements. And because a lot more money is at stake, landlords like longer-term leases. You must scrutinize every word of the lease terms or you might be stuck with an unfavorable agreement for a long time.
- More flexibility. However, this means businesses have more power to negotiate lease terms that suit their specific business needs.
What to Negotiate When Leasing Commercial Property
- Length. A short-term lease gives you more flexibility if your business needs change while a long-term lease may help you lock in a better rate. A shorter initial lease with one or more options to renew is often a good compromise. However, expect your landlord to require higher rent if you choose to renew.
- Rent. Always compare rates for similar spaces to make sure you aren’t being overcharged. While it can be difficult to lower rents, at least negotiate for a few months of reduced rent to compensate for moving costs. Annual rent increases are common, so ask for a cap on the increase. Finally, make sure you know if you’re signing a gross lease or a net lease. A gross lease includes insurance, maintenance, property taxes and utilities. A net lease doesn’t. So while a gross lease might cost more, it might end up saving you money in the long run.
- Improvements. The more improvements your commercial office space needs, the more bargaining power you’ll have. Ask your landlord to make these changes free of charge. And usually the longer the lease you’re willing to sign, the more your landlord will be willing to fix.
- Hidden Fees and Repairs. The US Small Business Association says landlords often add hidden fees for maintenance and upkeep for shared facilities. Make sure to check how utilities are managed and shared — ask to see examples of costs incurred by other tenants. Also be clear about who handles specific maintenance and repairs, requesting dollar limits on your expenses. If your landlord is unwilling to pay for all repairs, ask that she or he pay for the upkeep of certain systems such as the air conditioning or plumbing.
- Business Protections. To make the most out of your investment, always ask for add-on clauses that will best protect your business.
- Subleasing: If you can sublet your space to another tenant, this gives your business much more flexibility.
- Exclusivity: This ensures no direct competitors can lease other spaces on the property.
- Co-tenancy: A co-tenancy agreement can protect you from a potential loss of customers. If an anchor tenant leaves the property, you can break the lease if the landlord does not find a replacement.
- Default. Find out what will happen if you default on your lease payments. Will you be evicted immediately or can you negotiate for more time to pay? The more clarity you have, the better you can safeguard your business.
“Just like in the first grade, when negotiating a commercial lease, there are no dumb questions,” says Forbes small business and entrepreneur contributor Jim Blasingame. “And let your attorney look at the lease before you sign.”
Photo: This work “Leasing Commercial Property“, is a derivative of “Commercial real estate” by MoneyBlogNewz, used under CC BY 2.0 used under CC BY. “Leasing Commercial Property” is licensed under CC BY by UpCounsel.