Top 10 Practical Pointers in Negotiating Commercial Leases if you are the Commercial Tenant
Many businesses lease real estate to operate and conduct their businesses. The commercial leases have become increasingly longer and more complicated over the years, and there is no such thing as a “standard lease”.
Listed below are 10 practical pointers you should review if you are planning to lease commercial space:
- Realistically assess your strengths and weaknesses and your negotiating position. From the landlord’s perspective, leases are essentially a form of financing for a landlord. Questions to ask yourself – how much space are you leasing? Is it a large or small portion in relation to the other space if you are in a multi-tenant Center? What is your financial strength? Also, consider the current condition of the real estate market. How long has the space been vacant? Is it in a desirable geographic area? All of these factors will affect how much you are able to negotiate the terms of the lease with the landlord, including the rent.
- Identify the “real” cost per square foot. Often, leases are “net leases” which means that the tenant pays a base rent per square foot plus additional rent per square foot. This additional rent usually consists of all of the landlord’s costs of maintaining and operating the space and often fluctuates over the lease term. This additional rent is either called Common Area Maintenance Charges (CAM) or Operating Expenses (OE). The cost of this additional rent can be substantial. The tenant usually pays a proportionate share of the CAM or OE. Find out what your particular share is and what the current additional rent is.
- Negotiate a Cap on the CAM or OE and other key provisions. Since a net lease usually passes all of the costs of maintaining and operating the space through to a tenant, you should negotiate certain protections. These include a cap or limit on any increase on the CAM or OE. Also, negotiate that any capital expenditure incurred by landlord, such as roof replacement or repaving a parking lot, are amortized over the useful life of the expenditure. Add a right to audit the landlord’s calculation of the CAM or OE.
- Starting dates for possession, payment of base rent, and additional rent. These dates could all be different. Know what they are.
- Negotiating the Base Rent. If you wish to negotiate a lower base rent and the landlord is unwilling, ask the landlord for “free” base rent for a certain time period. Often, a landlord may agree to free rent instead of a reduction since it is more palatable to the landlord’s lender.
- HVAC replacement cost. The cost to replace an HVAC unit is not cheap. Since the landlord often will want the tenant to replace the HVAC unit if it fails, you should negotiate that you only pay for a proportionate share of the new unit based on the number of years remaining on the lease term and the useful life of the unit.
- Exclusive Use. Especially if your business is retail, you should negotiate that your business will be the only business of such type if you are in a multi-tenant center.
Default and remedies. Now is the time to limit landlord’s rights if tenant fails to pay rent or otherwise defaults. Typical provisions include adding notice and grace periods and a cap on damages if the landlord accelerates the rent. Another provision is to require the landlord to attempt to rent the space to another tenant to reduce landlord’s damages.
- Signs. Have a clear understanding of where the tenant may place signs, including who pays for the cost of the sign. Most tenants will want to have its sign placed on any pylon sign or directory, but often there may be limited space on a pylon sign.
- Personal Guarantee. If the landlord is requesting a personal guarantee, try to negotiate a dollar limit on the guarantee or a staged release so that the guarantee is reduced over the term of the lease.