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How to Know if Your Commercial Lease Terms are Good for You

Commercial real estate transactions are complicated. When your business is entering into a long-term lease, you want to make sure that your lease terms work for your organization. Your lease terms should support the future success of your business. Your broker will help you navigate through lease negotiations, but it’s important to have a good understanding of what to look for so that you are informed. Below several common clauses that you should be mindful of during lease negotiations.

 

Rent Clause
The amount of monthly rent may seem straightforward. However, there is a great deal of negotiation room, even before the rent is established. In addition to monthly rent, the following criteria can be negotiated in the rent clause:
• Automatic Rent Increases- what they are based on, when they go into effect and the rate of escalation
• Tenant Improvement Deductions- Landlord approved building improvements result in rent decreases
• How much of the landlord’s operating costs will be passed on to you
• Establishing a method for dealing with unanticipated rent issues and increases

Preparing for Your Lease Expiration

Description of the Premises Clause
Make sure that this clause accurately describes what you intend to rent. If you are renting an entire building, this could simply be the building’s address. However, if you are renting a portion of the space, make sure that your space is described in specific detail. You may also address “access” issues here. Access clauses ensure that your employees and customers have easy access to your property. You should also address shared areas (conference rooms, storage rooms, parking, etc.) in this section of your lease.

A Lesson in Leases: Types of Commercial Real Estate Leases

Term Clause
Many lease terms begin when the lease is signed. In some cases, that could be well before you even move into the new space. Even if rent is not due until move in, other terms of the lease become effective immediately. Have the start dates for different obligations written into this section.

Common Commercial Lease Clauses

Use and Exclusions Clauses
The use and exclusions clause defines how you can and can’t use the property that you’re leasing. Read these clauses very carefully, thinking about the future of your business. Some clauses restrict the type of business you can conduct, which could preclude you from expanding your business into new areas. Signage is often discussed here. The use and exclusions clause may restrict the manner and style of any signs or advertising on the premises.

The exclusions clause will state that you alone can do something that other tenants cannot. The purpose is to ensure that competitors can’t move in next door.

Common Commercial Lease Clauses- Round 2

Improvement and Alterations Clauses
Issues about design, aesthetics and what is “appropriate” can be complex and subjective. Consider who should pay for any changes, how those changes impact rent.

Common Commercial Lease Clauses- Round 3

Maintenance Clause
Be sure that it is clear who is responsible when problems arise, how maintenance issues are resolved and how they will impact rent. Landlords often include generic language about keeping the building “up to code.” Make sure that “up to code” is clearly defined.

Katie Boova
Katie Boova is Marketing Manager at Watchdog Real Estate Project Managers, a real-estate consulting firm that provides owner’s representation and project management services. More about Watchdog Real Estate Project Managers as well as additional blog posts can be found here.
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