Why is it important to negotiate commercial leases?
Updated: Dec 19, 2021
The commercial leasing industry in the United States, measured by revenue, has a market size worth 177.7 billion as of 2021. The industry is projected to grow by 8.7% by the end of the year. When looking to lease commercial space, it is essential to understand commercial lease negotiating tactics.
Negotiating for a commercial lease often takes longer than you anticipate. The initial lease agreement that you are provided with is a rough draft. Unlike most other contracts, such as residential rentals, commercial leases should go through a few rounds of negotiations where you request changes until the lease suits your needs.
Length of lease
It is commonly referred to as the lease term. A leasing term details how long the lease will be active, the available options for renewing the lease at the end of its time, and how long the tenant must cover the rent. During the negotiating period, you can discuss the terms of renewing the lease. Most importantly, you can negotiate to extend how long you are going to pay rent. Commercial lease contracts usually last for long periods, often longer than 12 months.
Rent Payment and Incidental Expenses
While discussing rent price, you should carefully examine other expenses related to the property. Go through the lease agreement to confirm who is responsible for paying specific incidental fees (the cost on top of the base rent). The expenses can include property tax, utilities and common area costs. To that end, there are different forms of commercial leases that allow a tenant to pay rent flexibly.
Gross rent lease – this is a type of commercial lease that allows you to [ay a single amount to the landlord that covers the base rent and all incidental expenses
Modified gross lease – For this lease, you and the landlord share several incidental expenses
Net lease - You typically pay for one incidental expense directly, such as property tax, while the landlord pays for all other costs.
Before you sign the lease, you can request turnkey improvements or turnkey buildouts. These are usually renovations that a landlord carries out at your request. Most landlords will offer such a service as a way of inducing a tenant to sign the lease. If the option is not included in the lease, you can ask the landlord if they offer you the service. You could also ask for tenant improvement allowance, which is a landlord's money to help renovate the leased space.
Turnkey improvements and tenant improvement are part of tenant inducements. These are incentives a landlord offers future tenants to encourage them to lease the commercial space. Some landlords can let you use the property for several months without having to pay for rent or help with paying for leasehold improvements. However, leasehold improvements that are attached to the building become the property of the landlord.
Business Protection and Maintenance Clauses
In most commercial leases, tenants generally share common space costs and repairs. These charges include janitorial services, snow removal, property management, landscaping and grass cutting. You should request a deal where the landlord pays for most of the maintenance costs. As a tenant, you can also ask for clauses that protect your business operations, including co-tenant and exclusivity provisions.
The Commercial Leasing industry in the US is the 2nd ranked Real Estate and Rental and Leasing industry by market size and the 70th largest in the US. However, commercial leasing is often more complex and negotiated than residential lease agreements. It is why having an attorney on your side when negotiating a commercial lease agreement is highly advised, especially one specialized in commercial real estate.