For businesses seeking to establish or expand their physical presence, securing the right commercial lease is essential. However, commercial leases are often complex, involving terms and clauses that can significantly impact your business. Here’s a guide on what tenants need to know before signing a commercial lease, empowering you to make informed decisions and protect your interests.
1. Understand Different Types of Commercial Leases
Commercial leases come in various forms, and understanding the differences can help you determine which is best for your business:
Gross Lease: In a gross lease, the tenant pays a single rent fee, and the landlord covers all property expenses, such as taxes, insurance, and maintenance.
Net Lease: In a net lease, the tenant is responsible for rent plus some or all of the property expenses. These include Single Net (N) leases (tenant pays rent + property taxes), Double Net (NN) leases (rent + property taxes and insurance), and Triple Net (NNN) leases (rent + taxes, insurance, and maintenance costs).
Percentage Lease: Common in retail, a percentage lease requires tenants to pay a base rent plus a percentage of their business revenue.
Understanding the type of lease will help you budget accurately and avoid unexpected costs.
2. Negotiate Lease Terms
Negotiating lease terms can make a significant difference in what you ultimately pay. Key terms to focus on include:
Rent Increases: Many commercial leases have built-in rent escalation clauses. Look for a clear understanding of when and how rent increases will occur. Consider negotiating a cap on annual increases, particularly if you’re signing a long-term lease.
Lease Duration and Renewal Options: Determine whether the lease length aligns with your business goals and look for flexibility in renewal options. A longer lease can secure stability, but it also locks you in, so you might want to negotiate exit clauses or renewal options if you anticipate growth or relocation.
3. Pay Attention to Common Area Maintenance (CAM) Fees
For multi-tenant properties, landlords often charge Common Area Maintenance (CAM) fees to cover shared areas like lobbies, parking, and elevators. These fees are often a point of negotiation, and tenants can sometimes request caps on increases or clarification on what’s covered. Be aware that CAM fees can vary significantly, so it’s essential to understand them thoroughly and ensure transparency to avoid unforeseen expenses.
4. Be Aware of Use Clauses and Exclusivity Rights
Commercial leases often include use clauses that specify how the space can be used. Ensure these align with your business needs and that the lease doesn’t restrict potential expansions or service additions. If possible, negotiate exclusivity rights, especially in multi-tenant buildings, to prevent competitors from opening nearby and affecting your business traffic.
5. Understand Property Maintenance Responsibilities
Who is responsible for maintenance and repairs? In many cases, tenants are responsible for minor repairs, while landlords cover major structural repairs. Make sure the lease clearly outlines these responsibilities and any associated costs. For example, you might want to clarify who handles HVAC maintenance, plumbing, or electrical repairs to avoid costly surprises.
6. Consider Subleasing and Assignment Provisions
If your business grows, moves, or evolves, you may want to sublease your space or transfer the lease to another party. Subleasing and assignment provisions outline your rights to do this, and they’re worth negotiating upfront. Some landlords may place restrictions on subleasing, so ensure that the lease allows you the flexibility to adapt as your business changes.
7. Examine Tenant Improvement (TI) Allowances
If your business requires modifications to the leased space (such as installing special equipment, altering layout, or adding brand-specific fixtures), discuss Tenant Improvement (TI) Allowances with the landlord. TI allowances provide funding for such modifications, allowing you to create a space that suits your needs. Ensure that the lease specifies the agreed-upon TI budget, who manages the work, and what happens if costs exceed the allowance.
8. Review Termination and Exit Clauses
Business situations can change quickly, and it’s important to have an exit strategy. Review the lease’s termination clauses to understand your options for early exit, including any penalties or fees. Some leases include “good guy” clauses that allow tenants to leave early if they provide sufficient notice and comply with certain conditions, so explore these if you want flexibility.
9. Seek Legal Advice
Commercial leases are legally binding documents with long-term implications. Even if you have experience with leases, it’s wise to consult a commercial real estate attorney to review the lease before signing. They can help identify potential red flags, negotiate terms, and clarify complex clauses, giving you peace of mind that your interests are protected.
A commercial lease is a significant commitment, and taking the time to understand and negotiate its terms can have a major impact on your business’s success. From lease structure and rent escalations to maintenance responsibilities and exit options, each aspect requires careful consideration. With a clear understanding of the lease and, ideally, professional guidance, you can secure a commercial space that supports your business’s growth and stability for years to come.
Specializing in Commercial Sales & Leasing,
Property Management and Multi-Family.
Website: www.dngcommercial.com
Email: deborah@rpmres.com | gulshen@rpmres.com
Call: 310.999.1203 | 562.225.9260
Comments