A big part of any business’s journey is acquiring space to conduct their activities. Whether you are looking for office, retail, or industrial space, it’s important that this first space has room for your business to grow.
Here are a few things to think about when negotiating your commercial lease:
Your Lease Terms
Pay close attention to when the lease term starts. If you’ve negotiated for a buildout, pay attention to the rent commencement date, how that date relates to when the buildout is supposed to be started—and completed—and when the space is ready to be occupied. You shouldn’t have to pay if you can’t occupy the space. Look into having a right to terminate the lease if the buildout is not started or substantially completed by specific dates. Additionally, have the landlord agree to a timeline by which any minor or punch list items associated with the buildout will be completed.
Rent and Charges
Lots of leases have terms which call for a base rent, plus a monthly variable charge for the landlord’s expense in maintaining the property. The expenses required to maintain the common areas, parking lots, and landscaping are a great example of this. Make sure that the charges associated with these improvements are reasonable. Understand how these charges can be increased, and potentially negotiate for a cap on how much these expenses can go up. Also, it’s important to know for which expenses you can be charged. I would try to exempt capital improvements to the building from these expenses. At any rate, make sure that the landlord has an obligation to give you a detailed accounting of variable expenses and that you have a right to audit these expenses to ensure accuracy.
Assignment and Subleasing
If you are looking for flexibility, you should negotiate the assignment and subleasing terms of the lease. Assignment of the lease is where you can get a third party to take over the lease and assume all your obligations to the landlord. With a sublease, you are bringing on a third party to take part or all of your space, but you remain primarily obligated to the landlord, and responsible for your sublessee. Lots of standard forms prohibit these activities.
If there is a right to reject a potential sublessee, make sure approval cannot be unnecessarily withheld by the landlord, and understand if there are fees associated with the approval process. Make sure that the approval process has to be concluded within a specified amount of time. Additionally, there may be lease provisions that allow for the landlord to get a cut of any amount you charge a sublessee that exceeds the rent you pay the landlord.
Default
A commercial lease will have terms that will say that you are in default if you do not perform your obligations as specified in the lease and will give the landlord specific remedies for these defaults. The most basic default in a lease is a non-payment, but you could be in default if you do not perform certain obligations, break the landlord’s rules, or go through business changes like a change in control or bankruptcy. Try to negotiate that the landlord has to give you notice of the default, and time to cure it. Understand the consequences of default, like increased charges. If you leave the space before termination of the lease term and stop paying the landlord, you need to understand what the landlord can do and what they can charge you.
In closing, read your lease before you sign it, and make sure the landlord has to behave in a reasonable fashion. If you get experienced legal counsel, they can help you understand your risk and know what you’re getting into. We can advocate on your behalf and suggest terms that are more favorable to you.
