When was the last time you read a terms and conditions agreement before tapping “accept?” The digital world trained us to accept contracts without reading the fine print. It’s a nasty habit – and it can be financially devastating when signing a commercial lease.
You might sign up for three to five years (or more!) of higher rent and unfavorable conditions. Or, you could be surprised with a termination clause you didn’t see coming.
How do you avoid being taken by surprise – or taken advantage of? It starts with negotiating your commercial lease to ensure it meets your needs.
Here are six steps to negotiating a favorable commercial lease.
Hiring a lawyer is expensive and decidedly less fun than solving today’s Wordle. We get it. However, you’re signing a contract that could impact your business for years to come. You want to make sure your best interests are covered. No matter how cool the property owner or manager is, this is a business deal and you need someone in your corner.
Another reason to hire a lawyer is because state laws can vary drastically. Even the most clever article from the best commercial lease platform can’t explain how local, city, and state laws might impact your commercial lease.
There are several types of commercial leases, each with its own clauses and rules. For example in a net lease, you are responsible for part of the building’s upkeep and property taxes. Those added costs might make the rent more expensive than you expect.
There are also percentage leases, where you pay a lower base rent, plus a percentage of your sales, usually around seven percent. Your lease might also mix net and gross lease rules. If the lease they offer doesn’t fit your needs, be prepared to counter-offer.
Unlike residential leases, commercial rents aren’t necessarily set in stone. Before signing on the dotted line, make sure you aren’t paying more than you need to by researching fair market value for the property. Here are a few tips to determine fair market rent for a commercial property:
• Divide property purchase price by gross annual rent. (This is called the gross rent multiplier.) Use that amount to compare rents more accurately.
• Look for other properties in the same city and compare the gross rent multiplier.
• Compare rent to other buildings in relevant market areas. For example, rents in North Cal will be more expensive than those in Quincy, Florida. To understand if the rent is fair, compare rents in regions with a similar cost of living.
Pay attention to other required costs beyond the rent, such as maintenance, taxes, and utilities. Those extra costs can turn a great deal into a pricey mistake.
If you find your lease doesn’t offer a fair market value, it’s time to negotiate. Depending on your business and location, you might ask for lower rent, a shorter lease, or a llama mascot—whatever, we don’t judge.
Always look at the fine print. Granted, in a commercial lease, most of the contract will be fine print, so you need to go through the lease with a fine-toothed comb. (And another good reason to get a lawyer involved in the process.) Keep an eye out for:
• Rent increases: Some leases tie your rent to third-party indexes, which can skyrocket costs. See if your lease includes this and consider how it might impact budgeting.
• Maintenance fees: Who pays for HVAC repairs, cracked floors, or a leaky roof? Some leases put these costs on the renter.
• Admin fees: Does the lease force you to pay for admin fees for the property manager? Consider asking them to be removed, especially if the rent is on the high end of fair market value.
Pro tip: Pay attention to how the landlord calculates your square footage. Most commercial leases use load factor to calculate the difference between usable and rentable square footage. While this is meant to factor in shared spaces like a lobby, some less scrupulous landlords might try to include spaces like utility or elevator shafts. Ask to see the calculations to make sure you’re paying for usable space.
A termination clause outlines conditions that can result in the end of the lease before the agreed upon expiration. Ideally, the clause is mutual and includes a 30 to 60 day notification period. For example, ending the lease if your business expands past capacity, doesn’t meet projected sales, or if damage to the building makes it unusable.
Some shifty landlords might try to sneak less reasonable clauses in or charge outrageous termination penalties. If the fees seem absurd, ask to have them removed. You can also suggest the addition of a break clause, which allows either party to end the lease at a predetermined point in the lease.
The final step of negotiating your commercial lease is to look at all the clauses. Not fun, we know—but these can impact everything from what you pay to what happens if zoning laws change mid-lease. Here are a few major commercial lease clauses to keep an eye on:
• Rent adjustment clause: We covered this a bit already, but it’s worth mentioning again. Check to see if your rent is tied to your sales or third-party indexes. Inclusion of these types of clauses isn’t necessarily a deal breaker, but you’ll want to be aware of them.
• Renewal clause: Moving into a commercial space is costly – you invest in marketing, improving the space, and building your customer base. A renewal option allows you to renew at a set price, protecting your investments.
• Sub-lease or occupancy clause: Can you sub-lease the space to another tenant if your business closes or relocates? Consider negotiating to add this clause for additional security.
• Improvement clause: After signing on the dotted line, you’ll have to adjust the space to fit your needs. Make sure your lease doesn’t restrict critical aspects of your build out. For example, can you add shelving, move walls, etc.?
When it comes to commercial leases, nearly every aspect is negotiable – at least to some extent. As you review the lease, consider your current business needs—and what you might need in the coming years.
Ask for adjustments and be willing to offer something in exchange, such as a longer lease term or paying a larger portion of utilities. The goal is to sign a mutually beneficial contract where everyone is happy.
Signing a commercial lease is a big step! Once the papers are signed, however, you need to track dozens – or even hundreds – of details. How many parking spaces do you have? Who is responsible for AC repairs? What is your renewal deadline? Keeping track of all those details (especially if you have multiple commercial leases!) doesn’t have to be a pain.
Leasecake makes managing your commercial portfolio easy by tracking critical lease clauses, rent bumps, and so much more in one easy-to-use dashboard. We’ll send you notifications, track expiring leases, even help you achieve and maintain compliance with the ASC 842 accounting standard.
Want to see what Leasecake can do? Let’s chat and we’ll show you what it’s all about.
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