Many business owners prefer to rent space rather than make a huge investment in commercial real estate. Leasing is a particularly good option if you initially have limited space needs, but anticipate a future move based on expansion.
It is a good idea, however, consult an attorney to help you navigate the laws that govern commercial leasing, and to help you make the best decision for your needs.
Even if you rent space from someone you know well, be sure that your lease is in writing. A commercial lease is an extremely important agreement, and a handshake won’t be enough if you and the landlord disagree in the future.
In general, it’s a good idea to research the going rate for space in the neighborhood before you negotiate. The SBA also advises allowing the landlord to make the first offer, and asking for a lower rent than you think you can initially get.
Your lease should cover these essential points:
- The amount of the rent. The lease should also stipulate the amount and date of any escalations in the rent – these are generally based on such factors as cost of living indexes or real estate forecasts.
- The length of the lease, the date it begins, and the terms for renewal. You should carefully consider how long you want to commitment to the property. If you anticipate moving in the not-too-distant future, a shorter lease obviously makes sense. If you hope to remain in the same location, a longer lease will better suit your needs. The longer you stay, the better your chances for renegotiating the rent or other aspects of the lease.
- The specifics of what is included in the rent. Does it cover utilities and water, or will you pay for those items separately?
- Whether you will be responsible for paying any portion of the landlord’s property taxes, maintenance expenses, or insurance costs, and how such payments would be calculated.
- The amount of any required deposit, and whether a letter of credit will be accepted in lieu of cash.
- A description of the rental space, defining square footage, rights of access, available parking, and any other amenities.
- A detailed listing of any improvement the landlord will make before you take occupancy. Signing a longer lease may make the landlord more agreeable to making improvements or renovations.
- Any representations made to you by the landlord or leasing agent regarding such things as average utility costs, amount of foot traffic, compliance with Americans with Disabilities Act, etc.
- Affirmation that the space is properly zoned for your type of business.
- Whether you may sublet or assign the lease to another party, and under what conditions. This will be important if you want to move from the space at a later date.
- The conditions under which either you or the landlord can terminate the lease, and any potential consequences of doing so.
There are a couple of pointers to keep in mind when it’s time to renegotiate your commercial lease. You should document your reasons for a lower rent or more space improvements with hard facts. These might include lower foot traffic than represented by the landlord, a downturn in your industry, and so forth. In difficult economic times, some landlords are willing to take a percentage of your sales in lieu of a flat rental fee.
The SBA also advises that, as a commercial tenant, you have considerably more leverage than a residential tenant when it comes to negotiating a lease. This is another reason to have an attorney on your side to ensure that your lease is the best option for your business.