Finding a location can be one of the most stressful times for a business owner. Especially now that vacancy rates are so low. According to industry publications, industrial vacancies reduced further in the 3rd quarter of 2018 despite the number of newly completed locations following the construction boom of 2017. Additionally, office vacancies decreased in the 2nd and 3rd quarters of 2018. This means that industrial landlords are back in the driver’s seat, and office landlords are not far behind.
In this Landlord friendly rental market, it is even more important to take the time to make sure that the lease is given a thorough review (preferably by an experienced commercial real estate attorney) prior to signing.
Below are ten (10) tips to help you successfully negotiate your commercial lease agreement.
TIP #1: USE A COMMERCIAL REAL ESTATE BROKER
Commercial real estate brokers can make the search for the ideal location easier; they are familiar with your area and can help you focus your search to only those locations that match your criteria. They know the landlords, understand local rental markets and know what is a fair price for the space you are interested in. While you might turn to an attorney to negotiate lease language, you rely on your broker to negotiate essential lease terms such as rent, term, and security deposit.
TIP #2: REVIEW THE LEASE AGREEMENT AND CONFIRM THAT IT INCLUDES THE ESSENTIAL TERMS.
When reviewing the commercial lease agreement verify that it includes the basic terms and that they match what you have been previously told. Mistakes are often made and miscommunications can happen so it is important to make sure the lease correctly states the basic terms such as rent amount, rent due date and length or term of the lease. It is important the lease properly describes how future changes (increases/decreases) to the rent occur and that it contains a detailed and thorough description of the permitted use of the leased space. Most leases normally contain a termination clause but you may have to request that your attorney include language that describes what happens if you need to break your lease. If you have been told anything by the Landlord regarding the lease or the leased space including if the Landlord has promised to make any repairs or modifications to the location or the overall building (even those which are supposed to happen prior to move-in) is stated in the lease. It is surprising how often terms in the proposed lease do not match the terms the tenant was expecting to see. A careful review can catch these inconsistencies before they become legally binding.
TIP #3: LOOK FOR ADDITIONAL PROVISIONS.
Your lease may include more detailed information than you were expecting, such as:
- Additional Rent: There are a number of different kinds of rent that can be charged in a commercial lease; see item #5 below Often, a lease will require that you pay certain additional costs or fees on a monthly or annual basis.
- Insurance Requirements: Your lease may require that you obtain certain levels of insurance or if you are required to reimburse the Landlord for the cost of his insurance. It is important that you speak to your insurance agent, both to verify that you have the required insurance coverage and to confirm the Landlord is not asking for too much coverage (i.e. increasing your insurance bills unnecessarily).
- Signage: Were you counting on hanging a sign announcing your business? The Landlord may have restrictions on what can be displayed and where. There is also a chance that you may have to pay additional fees for advertising space. Pay attention to the types of signs you are allowed to display and where you are allowed to display them.
- Hours: Your lease may clearly regulate the hours during which you are allowed to operate your business at the location.
- Sublease: It should be very clear whether you are allowed to sublease and the requirements for doing so. It is important that you read the lease carefully as sometimes the Landlord is allowed to cancel the lease if you make a request to sublease. Other times, the Landlord will charge a fee or require you to cover their costs if you make a sublease request. Business owners need to keep the future in mind, if transferring the lease is key to being able to sell your business, you will want to make sure that you are able to sublease without negative consequences.
TIP #4: NEGOTIATE AWAY THE UNFAVORABLE TERMS.
The lease provided by the Landlord will (almost) always favor the Landlord. You should always review both the lease and any exhibits attached to the lease. Do not be afraid to ask for any changes that you feel are necessary to ensure that the lease is fair to both you and the Landlord.
TIP #5: DETERMINE IF THE LEASE IS A NET LEASE OR A GROSS LEASE.
It is important to understand if your lease is a “net lease” or a “gross lease.” In a “net lease” you are required to pay a portion of the operating expenses (including utilities, insurance and maintenance fees) of the property in addition to the monthly rent. This additional amount is usually allocated among the tenants on a pro-rata basis (often based on square footage). In a pure “gross lease” you are only required to pay rent and are not responsible for any additional expenses. You may also have a “modified gross” or “cam stop” lease. These are leases that usually have a floor for expenses. This means that the cost for expenses in the prior years are incorporated in the rent so you only pay the Landlord more if those costs go up.
TIP #6: DETERMINE IF THERE ARE COMMON AREA MAINTENANCE FEES (CAM).
Common Area Maintenance (CAM) fees are expenses passed on to the tenants by the Landlord in a net lease. They normally include the cost of any maintenance around the property, such as parking lot maintenance, landscaping and janitorial services. It is important that your lease clearly specifies how the CAM fees are calculated as they will likely vary from year to year. If your CAM fees are based on the number of tenants, the percentage (%) of the CAM fees you are responsible for could increase if another tenant moves out or is evicted. If your CAM fees are tied to the square footage of the leased space, you will be charged the same percentage (%) every year regardless of who moves in or out.
TIP #7: FIND OUT WHO YOUR NEIGHBORS ARE…AND WHO THEY COULD BE.
It is important to know who your neighbors are as they can affect your business and could keep your clients away. For some businesses, it is important that the lease specifies the type of business that can and cannot rent nearby. When you sign the lease for your new daycare center, you might be unhappy to find out the next week that an adult bookstore is moving in next door.
TIP #8: KEEP AWAY THE COMPETITION.
The last thing any business owner wants is for a potential client to drive to their shop but at the last moment choose to go to a competitor instead (especially if that competitor is located right next door). You want to include a clause in your lease stating that the Landlord is restricted from leasing space to any business which competes with yours.
TIP #9: DO THE MATH BEFORE YOU SIGN.
Take the time to do the math and calculate all of the costs associated with the lease. As your lease is likely to be in effect for several years, you are making a big commitment and it is important that you are certain that your business can afford the rent, both this year, the next and the next. By identifying and then calculating all the costs you can reduce (possibly eliminate) any surprise expenses.
TIP #10: ASK FOR ADVICE.
Signing a lease agreement is a major commitment that lasts for years. It is not a decision that should be taken lightly. If you want to be certain that you fully understand what your lease says and the obligations it imposes upon you, or any other laws that may affect your business, or would like to schedule a free initial consultation, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.
Waltz, Palmer & Dawson, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Litigation and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, Guardianship, Divorce and Family Law.
This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.
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