By Scott D. Page |
Leasing commercial office or retail space can be one of the most important and complex initial business decisions for startups. While the following are some of the most important issues for startups to consider, they also apply to any commercial tenant entering a new lease.
Length of the Lease – One area of the lease to focus on is the lease term. A short-term lease is almost always to your benefit, especially if your business isn’t particularly location-sensitive and finding comparable space won’t be a problem at the end of the lease term. Shorter leases give you more flexibility if the needs of your business change. On the other hand, a long-term lease ensures that the business will have an affordable space for a predictable period of time, especially if you have found a favorable location for a retail shop or other business where location is critical. Also, landlords are often willing to make more lease concessions (e.g., free rent or more money for tenant improvements) on longer-term leases.
A good solution for most tenants is to negotiate a shorter initial lease with one or more options to extend the term of the lease. If you ask for an option, expect the landlord to want a higher rent for the renewal period. A right of first refusal on other available space at the property can also give you important access to additional convenient space at agreed upon terms if your business quickly expands.
Understand What “Rent” Covers – Another primary issue to consider when leasing commercial space is how much rent you’ll pay and what costs are included in the base rent. When considering options, look carefully at whether the landlord will pay for utilities, maintenance, repairs, security, janitorial services, parking, taxes and insurance, or whether you will be paying for such amounts as “additional rent.” These costs can potentially be significant and increase dramatically over the term of the lease, especially if exclusive systems (e.g., HVAC for IT equipment) are required for your business. Paying higher rent that covers these costs will eliminate expensive surprises down the road.
Tenant Improvements – If significant improvements to the space are required, you may want to use most of your bargaining power to have the landlord provide them at no cost to you. If you’re willing to sign a longer-term lease, the landlord will be more willing to pay for the desired improvements. It is also important to understand the tenant’s obligations to remove any specialty improvements at the end of the lease term before those improvements are installed to avoid unexpected expenses or disputes in the future.
Subleases and Assignments – Make sure you have the right to sublease or assign your leased space. These provisions, along with options to renew or lease additional space, provide flexibility as your business needs change. If you rent more space than you currently need to allow for expansion, you can sublease some of the space until you’re ready to use it. On the other hand, if you need to move out before the lease is over, you’ll have the option of finding another tenant to take some or all of your space and pay the rent, without having to negotiate an early termination or break the lease.
Give Yourself Time – Allow for three to six months to identify a property, agree upon important lease terms and negotiate a lease. The less time you have to make a move, the more leverage the landlord has to dictate terms and avoid the tenant concessions discussed above.
Find a Broker (and an Attorney) – Leasing commercial property can be a complicated process and should never be undertaken without knowledgeable parties explaining each step of the way and working to get you the best deal possible. A commercial real estate broker familiar with your business and locations of interest can help you focus on available and best options for your business, now and for the future.
Startups typically have very little leverage with landlords, but a good broker and attorney can help negotiate the best terms possible. Lease forms are almost always provided by, and favor, the landlord. An attorney can help explain the critical provisions of the lease and identify terms where the landlord will more likely make concessions.
Thank you for joining us on ClarkTalk! We look forward to seeing you again on this forum. Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. You should certainly consult legal counsel of your choice when considering this or any other real estate issue. If you wish to consult with the author of this post, please contact Scott Page by email at firstname.lastname@example.org or telephonically by calling him at (213) 629-5700.