Nine tips for negotiating commercial property leases
Protect your business interests by negotiating for several key lease provisions.
The reality of negotiating a commercial property lease for your business is that your landlord probably knows more about the process than you do. Protect your interests by hiring a commercial real estate attorney to review the lease and including these nine business-friendly clauses:
1. Term length: For flexibility, opt for short-term leases of one or two years. If your business thrives, you won't be trapped in a small space; if it fails, you won't pay rent for a startup that ended 10 years ago. Most landlords, however, want long-term leases to create a steady income stream. If you ink a long-term deal, use that bargaining chip to get free rent or landlord-funded renovations.
2. Maintenance and repair policy: Specify who will pay for maintenance and repairs. Don't assume your landlord will cover them. You can also prevent your landlord from raising upkeep costs by negotiating a fixed rate for common area maintenance fees.
3. Build-out options: Make sure your lease accounts for improvements you might make to the property. Clarify which improvements will be made, who will pay for them, and whether you have to return the property to its former state when you leave. Because build-outs add value to your landlord's property, they also improve your leverage in negotiations. Consider negotiating for a provision that states you don't have to pay rent until renovations are complete.
4. Co-tenancy clause: Successful co-tenants can help you attract customers while you benefit from their traffic. If a major co-tenant leaves, however, your business may suffer. If applicable and permitted under your state's law, try to include a clause that lets you cancel your lease or reduce your rent if that happens.
5. Exclusivity clause: Keep your competitors from moving into the same complex — and potentially snagging your customers — by negotiating an exclusivity clause.
6. Radius clause: Your landlord may ask for a clause that prevents you from opening another location within a certain radius of the property. If you have expansion plans, attempt to negotiate a smaller radius and a shorter time limit so it doesn't inhibit them.
7. Permitted use: Allow your business to adapt to changes by using broad terms in the "permitted use" portion of the lease, which covers who can use the space and how. Broad terms may allow you to sublet or assign the lease to someone else if your business struggles — or if it is so successful that you want to upgrade to a larger location.
8. Exit clause: If you're starting up, you may have to agree to a guarantee that holds you responsible for the rent if your business fails. Protect yourself with an exit clause that releases you from the guarantee after so many years of good payment. This also clarifies the circumstances in which your landlord can evict you.
9. Renewal options: Build in a favorable renewal clause so you can easily extend your lease and stay in the space if you like it. Include a predetermined renewal price to prevent your landlord from unexpectedly raising the rent. Also, add a predetermined time period for considering your options without penalty.
Interpreting your commercial lease can be complicated, especially if you discover hidden fees and fine print after you've signed. Look out for yourself and your business by being proactive in negotiations and enlisting the help of an attorney.