A Start-Up Business Owner’s Guide to Seeking a Great Lease

One of the challenges of starting and growing a business is finding the right space. After you have narrowed your new commercial space down to a few options,
for the most part, you have met your due diligence requirements—budget, type, location, and size. Now comes the daunting part—negotiating the lease.

Even if the local market favors buyers, you need to make sure your research is on target. Here are a few guidelines for negotiating a commercial lease for your new business.

Rent Pricing Models

Lease structure depends on the landlord’s preference.  Landlords have three primary ways to structure lease rates:

1.      Triple Net (NNN) – The tenant pays a lower annual base rent to the landlord but must pay additional expenses.
2.      Gross Lease – All of the operating expenses are included in the monthly rent payments.
3.      Modified Gross Lease – This lease type falls in the middle of the first and second options.

Lease Terms

This document is extremely important and need to be giving as much attention as any item on your checklist for comparing landlords and space. If you should incur any issue during your tenancy, the lease will determine how you must address such issue.

You should take special care to negotiate lease terms before you sign the lease agreement. Focus on issues that you believe affects day-to-day business operations and profitability.

Here are some of the most common clauses you should become familiar with in a commercial lease:

•        General Information – This section contains details of the property, rent payments, square footage and information on the parties to the lease. It should also contain the start date and end date of the term, any improvements to be made by the landlord and other pertinent information.
•       Maintenance – Have a clear understanding of common area maintenance (CAM) charges include in your base rent amount. Know who has responsibility for the replacement of light bulbs, plumbing, heating and cooling unit breakdowns and other building systems that malfunction. Negotiate a dollar limits on how much you must pay for maintenance and repair.
•      Landlord’s Liability – This clause contain limit the landlord’s liability in case something unfortunate happens in or on the property. Get a good commercial general liability and property insurance policy to protect your business/property as well as claims against your business.

Some other provisions commonly found in commercial leases are: Assignment and Subletting Destruction of Premises, Event of Default, Space and Parking Rules, Holdover and Improvement Allowance.

Remember, these are just some of the major lease terms. When you receive the lease, if you do not understand the contract or do not have time for a thorough review, have your attorney review the lease and recommend changes to save yourself a lot of potential heartache.

If it’s possible that a certain matter might adversely affect your business operations or profitability, make sure the lease covers the situation.

Setting the Term of Your Lease

Rent and term are the usually the first points taken up in a negotiation. Do not over-commit when bargaining process because you want to retain some flexibility over the long term. Most professionals who represent tenants recommend you negotiate one or two year lease agreements with options for renewal.

Include in negotiations annual rent increases over the lease terms and subsequent lease renewals. Remember, it’s only natural that the landlord or broker will want to lock you into a longer term and maximize total lease value. This is where business intelligence on local market conditions and what other tenants in the property proves very helpful.