There is no such thing as a standard commercial lease. Still, many tenants are content to sign one without much consideration for its provisions and what it means in terms of their responsibilities.
“Don’t go into a leasing situation with the intention of just signing a lease,” says Andrew Perry, Esq., a principal at McCarthy, Lebit, Crystal & Liffman. “It’s important to review the terms, especially clauses related to operations, maintenance and repair. Tenants that don’t scrutinize the terms and negotiate for a better deal could get burned by unexpected expenses.”
Smart Business spoke with Perry about how to get the best terms in a commercial lease.
What are the more costly aspects of commercial leases for tenants?
Tenants should first look at the basic rent amount. It’s common for a lease to stipulate that rent will increase annually on a price-per-square-foot basis. That sometimes goes unnoticed before signing and ends up being a surprise later.
Operating expenses that will be passed through to a tenant are always an issue that should be heavily negotiated by a tenant. Landlords generally pass through expenses to their tenants, such as operations and maintenance costs for a building, shopping center or industrial park.
That can simply mean lawn care, snow removal, security, etc. But often, a landlord will include terms in this section to pass on the cost of capital improvements, such as a new roof, new HVAC, other building systems or the repaving of parking lots. These can be a huge financial backbreaker for tenants that hadn’t preplanned for such costs.
Similarly, the maintenance and repair section should be closely scrutinized. Not knowing upfront what your obligations are for maintaining your space during the term and at surrender can also be extremely expensive.
The maintenance and repair section often requires a tenant to repair and replace anything that affects the premises, including repairs and replacements that are a capital expense. Those can become huge dollar items that can sneak up on a tenant if not negotiated before signing.
What should prospective tenants consider before signing a commercial lease?
Tenants with a growing business need a plan to physically accommodate that growth. The business will run into problems if a tenant signs a five-year lease on a 5,000 square-foot space that it outgrows in the second year.
The opposite is also true. It’s common for certain types of businesses (especially restaurants) to spend a lot of money to develop the look of the premises, only to go out of business because they weren’t able to achieve the level of growth needed to offset the investment. Tenants should tie the location and its expenses into the business plan to ensure it’s affordable and aligns with the company’s trajectory.
Often, it’s a tenant that wants a certain amount of changes to the premises before they move in. That can be handled any number of ways. A landlord could offer a dollar amount, called a tenant improvement allowance, to offset renovations, but require approval before any work is begun.
Similarly, the landlord might do the work on a tenant’s behalf up to the allowance amount. In each instance, it is extremely important that the tenant make sure that the cost to do the renovations is tied down upfront, otherwise they could once again be faced with unplanned expenses if the work exceeds budget.
Who can help prospective tenants negotiate the best commercial lease terms?
It’s best to enter negotiations with a three-person team — the tenant, an experienced broker and a knowledgeable attorney.
It is especially helpful if you can find an attorney and broker who specialize in a certain type of real estate sector. For instance, there are brokers who specialize in finding the best location for retailers, while others focus on office buildings or industrial space. They’ll each have a better idea of the incentives, prices, amenities and locations that are best suited for a tenant’s business.
Similarly, a good attorney will know what is reasonable for a particular real estate sector and which areas of the lease can be fine tuned to the tenant’s benefit.
The landlord generally determines what type of lease will be used. But there is negotiating room for tenants that either have clout or a savvy attorney and a good broker. ●
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