How to negotiate a commercial lease?
Here are the six basic steps to negotiating a commercial lease: 1. Calculate your office space needs and find a property with space for lease 2. Investigate your prospective commercial landlord 3. Research market standards 4. Review every clause with a legal counsel 5. Provide your own counter-terms 6. Negotiate through to a point of agreement
How to make the process of leasing a commercial property easier?
Here’s how to make the process go smoothly. A commercial lease should include the lease term and type, rent amount, security deposit details, permitted use clauses, exclusive use clauses and details about maintenance and renovations, as well as .
What is a commercial lease and how does it work?
What Is a Commercial Lease? A commercial lease agreement is a contract for a business to rent an office space or other business property from a landlord. The term ‘commercial’ simply means that the lease is for business activities rather than housing.
What should be included in a commercial lease agreement?
The lease agreement should state the type of lease and the basis for calculating rent. The above terms are standard arrangements but, like other parts of a commercial lease, are subject to negotiation. What Are the Other Important Terms in a Commercial Lease?
1. Use Electronic Platforms
Commercial lease terms can get complicated in a hurry, and you should use an electronic document repository at the very least. However, problems can potentially begin right from the start. Searching for commercial properties can turn into a headache if you don’t do it right.
2. Review Essential Terms
Commercial leases are complex beasts, and their terms can throw off even the most seasoned investor or lessee. Lessees must review all terms and understand their meaning before signing off. For instance, what kind of a lease is it? A triple-net lease carries very different connotations from a standard lease.
3. Learn from Neighbors
Before signing on the dotted line, it helps to speak to existing tenants and their neighbors. What is the commercial footfall like, and is it sustainable? How do seasonal patterns play out? What are some red flags that you should watch out for as it relates to the landlord?
4. Remember Your Needs
Lessees often get lost in the excitement of signing a new lease and forget to prioritize their needs. An excellent example of this is ignoring a radius clause in the lease agreement. Radius clauses are essential to ensuring a good tenant mix. A good landlord will always include them by default and will mention them unprompted.
Flexible, but Complex
Commercial leases are incredibly flexible, but they can get complicated if you don’t pay attention. The four points highlighted above will ensure you always secure the correct terms and protect your interests.
How Is a Commercial Lease Different from a Residential Lease?
While the basic concepts and terms of a commercial lease are similar to a lease you might have signed for an apartment, there are still differences between commercial and residential leases that you need to be aware of. Residential leases are often highly regulated with some terms that cannot be changed by law —even if both parties agree to waive those terms. On the other hand, commercial leases have virtually no restrictions beyond basic contract law.
Do Commercial Tenants Get Any Legal Protections Outside of the Lease Agreement?
On the other hand, a commercial lessee generally has no rights other than what is explicitly stated in the lease agreement.
What Are the Common Types of Commercial Leases?
There are several types of commercial leases beyond a simple flat monthly or annual rent arrangement.
What If the Landlord Wants to Change the Lease?
To make changes, they would typically need to wait until the next renewal or offer the tenant something to get them to agree to the changes.
What If the Tenant Wants to Change or Get Out of the Lease?
Just like tenants have the right to expect their landlord to follow the lease, the landlord also has the right to expect tenants to follow the lease. There are, of course, exceptions to the rule.
What Happens If There Is a Dispute about the Lease?
In the event of a lease dispute, the resolution process depends on the type of dispute.
What are the basic terms of a lease?
Basic terms include the following: 1 Lease term – How long is the lease? Will it end on a fixed date or subject to conditions? Does either the landlord or tenant have an option to extend it or cancel early? 2 Rent – How much is the base rent? Does it increase at set time periods? What other charges are included in addition to rent? 3 Other costs – Who pays for items such as building insurance, property taxes, and routine maintenance? 4 Security deposit – How much is it, and when may the landlord withhold it?
What is a gross lease?
Gross lease: In a gross lease, you’ll pay the landlord one monthly fee, which will cover the rent and all operating expenses. This includes things like utilities, insurance, maintenance and property management. Many people prefer a gross lease because the costs are fixed.
What does a co-tenancy clause do?
A co-tenancy clause will lower your monthly rent if a large number of tenants suddenly leave. And if you agree to a long-term lease, you can request a clause to sublease the space if your business runs into financial problems.
What to know before agreeing to lease terms?
Before agreeing to any lease terms, research the property you’re considering renting. Are there other tenants in the building that have access to common areas? Will you have adequate access to things like parking?
What is the penalty for breaking a lease?
What is the penalty for breaking the terms of the lease? Some leases will require you to pay the entire amount owed on the lease if you choose to break it. If this is the case, you should negotiate for better terms.
What is termination clause?
The termination clause outlines the terms under which either party can cancel the lease. For instance, can your landlord terminate your lease for missing one rent payment or do you get a bit more leeway?
Why do people prefer a gross lease?
Many people prefer a gross lease because the costs are fixed. Net lease: A net lease comes with a lower monthly rent, but you’ll also pay a certain percentage of operating expenses. For instance, if you have a double net lease, you’ll pay rent, property taxes and insurance.
What to do if you are expected to pay for operating expenses?
If you’re expected to pay for operating expenses, you’ll want to understand all the costs involved and make sure they fit within your budget. If you have a net lease, what specific maintenance costs are you responsible for? You’ll also want any future rent increases clearly outlined in the lease agreement.
What is Hartman Income REIT?
Hartman Income REIT has a team of leasing professionals who can take you step-by-step through the negotiation process. Going into a lease negotiation armed with knowledge will help you achieve better outcomes, save time and money, and get some well-earned peace of mind.
How long does it take to negotiate a commercial lease?
Negotiations can take anywhere from a few days or as intensive as months of work to settle negotiations for your commercial lease.
What is the ultimate goal of counter terms?
With your list of counter-terms, you may define some to be negotiable and others not. The ultimate goal is to reach a point of agreement that is mutually beneficial. To assist you in reaching a point of agreement, consider working with a leasing broker. Having a qualified leasing broker to walk you through the process can be instrumental to having objective, productive exchanges.
What is the importance of knowing how much space you need?
Knowing how much space you need, and finding a property that fits those specifications should be your first priority. It’s relevant for negotiations because , in your search, you will work with a commercial realtor, investigate comps,assess market value and more. You also may calculate usable areas vs. rentable areas if you intend to generate income in that way. All of this is key data to inform your terms for negotiations.
What is the purpose of commercial real estate negotiations?
Take it upon yourself to understand the landlord’s track record, holdings and other dynamics that may impact a potential long-term relationship.
What factors affect the timeline of a commercial lease?
Inspections, permits, renovations and other factors may also affect the timeline of your commercial lease.
Who is Sarah Hoopes?
Sarah Hoopes is the Marketing Coordinator at Hartman Income REIT. She is a graduate of Utah Valley University with a Bachelor’s degree in Marketing and Business Management.
Why do landlords ask for security deposit?
Your landlord may ask for a security deposit to assure that cash will be available if you fail to pay the rent or don’t make other payments required under the lease. Cash is by far the most common type of security—and it’s what most landlords prefer.
What is the most common security for a landlord?
Cash is by far the most common type of security—and it’s what most landlords prefer. But it’s not the only way to satisfy the landlord’s requirement that you provide a cushion. Getting Your Security Deposit Back When Renting Commercial Space. When your lease comes to an end, either by its own terms or by early termination, …
What happens when a lease ends?
When your lease comes to an end, either by its own terms or by early termination, you’ll be entitled to the return of the deposit, less any sums that the landlord has properly withheld.
Do commercial leases require a security deposit?
Security Deposit in a Commercial Lease. Just like a residential rental or lease, your commercial landlord is going to insist on a security deposit. The security deposit can be used by the landlord for a number of reasons, but most commonly it will be used to cover any damage at the end of your lease if you do not renew your agreement.
Can you use a letter of credit as a security deposit?
Letter of Credit – In some cases, you can use a letter of credit rather than cash as a security deposit. You’ll need to work that out with your bank and your landlord. Return of the Deposit – Once your lease is up, you’re entitled to the security deposit.
What should a commercial lease include?
Keeping in mind that you should seek professional advice before committing to a lease, here are a few of the major components to look for:
What is triple net lease?
A triple net lease is basically the opposite of a gross lease, because the tenant pays not only rent but also the operating costs of the building.
What is an absolute NNN lease?
Less commonly, there are absolute NNN (or bondable) leases, in which the tenant pays all costs of the building repair, including roofing, for example.
What is loss factor in a full service lease?
This is where the "loss factor" of rentable versus usable space comes into play, because the tenant will be paying for a portion of the common areas as well.
What should be included in a commercial lease?
A commercial lease should include the lease term and type, rent amount, security deposit details, permitted use clauses, exclusive use clauses and details about maintenance and renovations, as well as . The most important thing you should do before you sign a commercial lease is to learn the language that’s used.
How to negotiate a commercial lease?
Negotiating your first lease for office or retail space can be an intimidating process for new business owners. Here’s how to make the process go smoothly. 1 A commercial lease should include the lease term and type, rent amount, security deposit details, permitted use clauses, exclusive use clauses and details about maintenance and renovations, as well as . 2 The most important thing you should do before you sign a commercial lease is to learn the language that’s used. 3 You should also consider seeking out professional advice before you sign a commercial lease.
What is usable space?
Usable space is strictly the space you occupy and use for your business. You may be charged more for the shared costs of the full rentable space of the building.
Laws can vary quite significantly from state to state, and that includes the laws that interpret leases. Novice commercial property owners may not be aware that a contract can designate which state or jurisdiction’s laws will apply to it.
Improvements and Alterations
With demand for commercial property at an all-time high in 2021, it’s becoming more difficult for tenants to find a space that meets all of their needs. Many properties will need alterations to make them suitable for the tenants who wish to lease them.
Subleasing is another clause that is particularly vital in our current environment. As some workplaces downsize their teams or shift staff members to remote employment, they may find that they have more square feet than they need.
Consumer prices have increased more than 6 percent in the last year, the biggest jump in inflation in three decades. As a lessor, that means it now costs you more to maintain your property. If you don’t have a rent escalation clause in your lease, you are solely responsible for covering those unexpected expenses.
With competition high for commercial space, many prospective renters are willing to negotiate to acquire the space they want. They may promise or agree to terms that would not typically be included in a boilerplate lease.
As a landlord, you hold certain obligations for the maintenance and repair of your property, and your tenants expect you to perform these duties. When property owners don’t take corrective actions, the tenant self-help clause outlines when renters can take matters into their own hands.
In the event that you and your tenants have a disagreement about any of the terms of the lease, the dispute resolution clause outlines how to resolve those issues. Often, leases will outline a multi-step approach, beginning with mediation, then progressing to arbitration before resorting to litigation.
What is a commercial lease agreement?
A commercial lease agreement is a binding contract between a landlord and a tenant for the rental of a property specifically for business purposes like office, retail, commercial or industrial space. This will contain the terms and conditions of the lease including the rent, term, penalties and allowed uses of the property.
How long does a commercial lease last?
Depending on the business conducted on the property, the term can vary significantly—from weekly to yearly. However, commercial leases typically last between three to five years.
Why is a written lease important?
Here are a few more reasons a written lease is important: It helps you avoid disputes.
How many classes of commercial real estate are there?
Commercial properties are separated into four classes based on their purpose: office, industrial, multifamily, and retail. Office.
How to calculate the size of a space?
Size. To calculate the size of the space needed, determine the number of customers or the size of your workforce to determine the square footage. For retail or restaurant space, figure out how many customers you expect to have on average and multiply that by 15 square feet. For office space, forecast the desired size of your workforce and multiply it by 100–150.
What is flex warehouse?
Flex warehouse space includes a mix of both industrial and office space. Flex warehouse space can be converted quickly to and from an office, industrial or mixed-use space.
How to determine available space?
Determine Available Space. Measure and calculate the square footage. You can do this by multiplying the length and width of the interior usable space.