Successful Negotiation of a Commercial Property Lease
- Jul 02, 2014
It’s mind-boggling the number of different types of commercial property leases that are in existence. There are a few that could be considered standard boiler plate leases; it needs to be understood that all leases are negotiable. However, there are many clauses that the landlord or tenant may not be willing to compromise on. Below are a few of the general provisions that might be up for discussion.
Length of Lease
Depending on where a business is in its life cycle, you may want to sign a long-term lease, a short term lease, or a hybrid of the two. One may generally think of a long term lease as 10 years and beyond. Short term lease would be considered 1-3 years, and a hybrid is somewhere in between. If it is an established company, with consistent revenues and growth, it may want to sign a 3-5 year lease. If it is a business that requires extensive amounts of capital to get it up and running (such as a manufacturing company) it may warrant a long-term lease, in order to justify the moving and set up costs. If the company is new, extremely volatile, or has some other logical reason, it may want to sign a short-term lease. One advantage of a short-term lease is the flexibility one has with regard to their business. Short-term leases allow companies to be extremely nimble and change direction relatively quickly. Also, in a decreasing market environment, a short-term lease may allow a reduction in rent. There are also disadvantages. In a rising market, short-term leases could create the opportunity for the landlord to increase rent beyond an acceptable level. A short-term lease could also force a tenant to relocate should an option to extend not have been negotiated. Another disadvantage is generally the amount of tenant improvements provided by a landlord, which is either insignificant or drastically reduced. Most landlords will not invest much money for a short-term lease.
A long-term lease has advantages in that it allows a tenant to plan for the future and feel comfortable about investing money into a space in order to create a profitable working environment. In a rising market it could also secure a below-market-lease rate in the near future. The disadvantages are that it locks in a tenant for a long period of time, which decreases any potential flexibility the tenant may require. In a decreasing market, the tenant may be at an above market lease rate in the future years. An advantage is that landlords will often provide a long-term tenant with a greater amount of tenant improvement dollars in order to adequately fixturize the property.
Consider adding protection clauses to your lease by making sure a sublease provision is included in the event a tenant needed to move in a different direction should his or her business plan change. Another protective clause is the option to terminate. Many landlords and lenders do not like such clauses. Should an option to terminate be negotiated, often there is some type of penalty that would usually be unamortized by landlord expenses, and a 4-6 month window of notice period that would provide the landlord some marketing time.
Depending on who has the leverage in the negotiation, several other clauses could be discussed.