You’ve selected a space where you’d like your business to be located. Now you can expect the landlord to offer you a commercial lease. But chances are this document has been prepared either by the landlord or its attorney. Therefore, it’s likely the lease will be biased in favor of the landlord, not you.
However, don’t let this fact intimidate you. The reality is that you can negotiate terms that will protect your rights as well. In fact, every aspect of a commercial lease can be theoretically adjusted so that both parties are satisfied.
For this reason, I’d like to examine some of the essential terms and conditions that you can modify in this agreement. The objective is to choose an ideal location for your business and then negotiate a lease that provides the fairest terms possible.
Items to Negotiate
When drafting a lease, one of the most important issues is the length of time that is covered by the lease. At least in the beginning, consider short-term leases (e.g. 1—2 years) because they give you flexibility in case your business needs change. In this way, if your business is expanding, you will have the flexibility to move to a larger space and will not be locked in to a space that limits your growth.
But it is equally important to have the peace of mind of knowing that your business will not be required to relocate if it does not need to do so. Therefore, the vest solution for balancing the need for stability with the ability to expand to a larger space, is to sign a short term lease with an option for you, not your landlord, to renew your lease on essentially the same terms as your existing lease. This means that your option to renew does not require your landlord to accept your renewal decision. To the contrary, your renewal will only require your timely unilateral issuance of written notice to your landlord.
Rent is another key area. If the rent seems too high, it’s possible to negotiate the first months at a lower amount to compensate for your moving costs. In addition, although it’s standard for the landlord to require an annual increase, try to cap the amount so that the costs are more reasonable.
Also, be aware of whether the operating expenses of the building in which your business is to be located are included in the rent. If you’re given a “gross lease,” the rent excludes these costs and they are paid for by the landlord. A “net lease,” however, means you’re expected to pay these bills, which could cause your overall rent to be extremely expensive.
Finally, if the space needs a lot of improvements, it’s wise to negotiate in a way that forces the landlord to do the repairs at no cost to you. By signing a longer lease, there’s a better chance the owner will absorb these costs.
A Final Note
Before you begin to negotiate the terms of a commercial lease, it is highly advisable that you have an attorney evaluate the proposed agreement and provide you with recommended revisions.
Next time, I’ll continue this series with an explanation of basic lease provisions and insurance.