If you are considering leasing new office space or signing any commercial lease, here are things to consider before signing on the bottom line:
1. Term
The term of a lease is almost always negotiable. Few landlords will insist on a long-term commitment if the space has been sitting empty for any length of time. If you are hesitant about getting locked into a long-term lease, here are some optional terms to consider:
Month-to-month lease: These are rarely offered, but landlords will consider them, especially if there are a lot of comparable vacancies in the area. The downside is that the monthly rent will be higher than with a long-term lease. Another downside to consider is that if the landlord finds another potential tenant who is willing to sign a longer lease, you could be out of an office on very short notice.
Short lease with renewal option: Commit for a period of time, perhaps 6 months, with an option to renew. Typically the renewal period will take you to the term the landlord wanted in the beginning. Be sure to specify the renewal rent up-front. Otherwise, you could find your monthly rent increased beyond what you are willing to pay.
Option to cancel: A variation on the renewal option contract is a long-term commitment, say, 3 or 5 years, with an option to cancel with 3 to 6 months’ advanced notice. A lot of landlords will agree to this.
Cancellation Clause: Sometimes you want to protect yourself “just in case:” in case your business fails, in case you sell the company to someone else, in case circumstances change. You might want to consider adding a clause into your rental agreement that allows you to cancel the lease “with cause” with 30-day notice to the landlord. You should specify some specific causes that the landlord must accept, plus put in a phrase that says “approval will not be unreasonably withheld.” Often you will need to agree to pay a cancellation fee, sometimes as much as two months’ rent, in order to protect the landlord.
2. Monthly Rent
The monthly rent and what services are and are not covered are usually the most talked about aspects of renting a business space. Often, monthly rent can be lowered by agreeing to a longer term. Be on the lookout for escalation clauses. Often, landlords will include clauses that allow them to raise your rent in response to changes in the government’s Consumer Price Index or other national barometers. If your landlord insists on this type of clause, try to at least get a cap on the percent of increase, with phrasing like “in no circumstance can raise exceed 4% per year.”
Also be aware of “penalty” provisions. Make sure you understand the penalty for late payments. Some commercial leases have a flat sum as a “late fee” and then a penalty charge as high as $10-$15 per day. That can easily add $300+ to your monthly rent. If you have a good credit history, many landlords are willing to negotiate it down or eliminate it altogether.
3. Common Area Maintenance
Make sure you inquire about CAM (Common Area Maintenance) fees. Often, landlords with multiple tenants charge each tenant a separate charge for maintaining shared spaces, such as lobbies, restrooms, parking lots, etc., in addition to the monthly rent. If your landlord charges you for CAM, make sure it’s a stated amount, not just “5% of actual expenses incurred..” With the latter phrase, you may be surprised by a large bill when the landlord decides to replace the furniture in the lobby or it snows for a month.
4. Deposit
Unlike residential leases, commercial leases vary widely in their deposit requirements. Many commercial leases ask for three months in advance, but one is usually sufficient. Some landlords are willing to simply add an additional amount to the first 6 months’ rent on a long-term lease. Again, try to negotiate the best deal for you.
5. Damages to Premises
Make sure your contract reserves your right to cancel the lease if the building is destroyed or severely damaged by a natural occurrence (tornado, flood, war, fire caused by another tenant, etc.). Often called a force majeure clause, this provision guarantees that if you cannot do business for 30 days or more, you should have the right to move elsewhere without penalty. Your right to cancel should also apply if damage occurs elsewhere in the building in such a way that it interferes with your access and use of your office.
Many rental contracts limit your right to sublet or assign your lease. Many landlords, however, are willing to agree to an assignment or sublease “with landlord’s consent.” Just make sure you add a clause that states that “landlord’s consent will not be unreasonably withheld..” That way if you find a good tenant, it’s harder for the landlord to say “no.”
7. Liability, Business, and Other Insurance
Insurance is a must. But different landlords will have different requirements, which can impact your overall costs. Make sure you calculate your insurance costs in determining which office is right for you. One common business insurance is Comprehensive Liability, which covers property damage and claims of persons injured on the premises. This will typically have high per occurrence coverage amounts. However, depending your type of business and type of building, you may be able to buy a Public Liability policy to cover claims from guests and business invitees and a separate Fire, Casualty, Business Continuation and Loss policy to cover the property damage. Often, buying the two policies separately can save some money because there are often different per occurrence coverage amounts required. Depending on your landlord’s requirements you should try to negotiate the best deal for you.
8. Repairs and Property Improvements
Make sure you clearly understand who is responsible for what repairs and property improvements and how to get service performed. If you are responsible for interior modifications, make sure you understand the approval process. If at the time of signing the lease there are repairs to be made, get a commitment in writing from the landlord and a deadline. Many lessors find it’s harder to get a landlord to make minor repairs once they’ve moved in.
If you are selecting a certain complex because of high visibility or foot traffic business, you may want to request that your landlord agree to grant you business type exclusivity. That way, another coffee shop, or another financial planner, or another CPA doesn’t move in next door.
10. Use of Space Restrictions
Make sure there are provisions in your lease that restrict the landlord’s ability to reduce the space necessary to conduct your business, including common areas and parking lots. If there is a shared conference room that you depend on to meet clients, make sure there is a provision in your lease that allows you to either leave or reduce your rent if the landlord decides to remodel it into a rental space for another tenant. Parking spaces are also often a point of contention, especially in strip center areas where the landlord may be looking to add out-buildings.
11. Right of First Refusal
A commonly negotiated provision in commercial leases allows a current tenant a right of first refusal to either rent available spaces in proximity to their current lease, upgrade to a newly available space without penalty, or allow the tenant to purchase the building if the landlord wishes to sell.
As with all contracts, make sure you read it thoroughly and never sign a lease that has blank spaces – as you review, go ahead and write NA (not applicable) in any blanks. If you have any questions, make sure you ask the landlord. If you still have questions or concerns, have your attorney review it before you sign. Any reputable landlord will allow you time to have the lease reviewed by an attorney. If they balk at that request, you should seek another space.
