Commercial leases play an integral role for businesses that wish to lease property for their commercial operations. They define the terms of how businesses can use the leased spaces and stipulate the charges, rights, and obligations of both parties – tenants and landlords. When signing a commercial lease, it’s crucial to take a careful look at several factors before putting pen to paper. This will prevent you from any potential woes and guide you in ensuring that the lease covers all necessary aspects to ensure your business thrives in its new location. In this article, we will explore the first two key factors that you need to contemplate while signing a commercial lease.
1. The Rent Terms
Rent terms are among the most important parts of commercial leases. They not only outline the amount a lessee will pay but also detail other associated costs such as maintenance fees, taxes, and insurance which can significantly affect your overall cost. At times, these charges are incorporated within the negotiated rent and you may need to clarify if that is the case.
Despite seeming straightforward, many get lost in the nitty-gritty of it. Apart from asking whether the rent of the property aligns with your budget, you should also ask if it’s reasonable compared to similar properties within your location. Information about the average rent price in your location can give you a bargaining chip during negotiations.
2. Lease Duration and Renewal
When signing a commercial lease, the length and renewal terms of the lease could hugely impact your business operation. Commercial leases can span from a couple of years to a couple of decades. You would want a lease duration that provides longevity to your business, but at the same time allows for flexibility. It may not be ideal to bind your growing business to a location for too long, as expansion or relocation might be essential as you scale.
Renewal terms should also be under thorough inspection while reviewing commercial leases. Most commercial leases have a renewal clause which gives you the option to extend the duration of the lease before it expires. Ensure the terms of lease renewal suit your long-term business plan. When evaluating the renewal terms, ask if there will be a rental increase, and what process is there for a rental reassessment.
3. Commercial Lease Types
Understanding the type of commercial lease you’re diving into is essential. There are several types of commercial leases and each have different implications on tenant’s expenses.
Gross Lease
In a gross lease, the tenant typically pays a higher base rent, and the landlord assumes responsibility for all or most of the property expenses, including taxes, insurance, and maintenance. This lease type might be beneficial for businesses looking for predictable monthly expenses.
Net Lease
In a net lease, in addition to the base rent, the tenant also pays for certain property expenditures. The extent of the cost-bearing varies depending on whether it’s a single, double, or triple net lease. The triple net lease—where the tenant shoulders almost all property expenses—offers a lower base rent but potentially higher monthly expenses, so it may be ideal for businesses wanting more responsibility over the location.
Modified Gross Lease
This type of lease is somewhere in between gross lease and net lease structures. While a tenant pays base rent, some of the property expenses are shared between the tenant and the landlord.
When considering the type of commercial lease, it’s essential to understand what costs you would be inheriting with each type and how it influences your budget planning.
4. Allowable Business Activities
The next important factor to check in your commercial lease is whether it allows for your planned business activities. Some commercial leases come with restrictions on the types of activities that can take place in the property. If your lease restricts your intended business operations, it could severely impact your business plans. The agreement should be checked for any clause that could limit your use of the property and should clearly outline what business activities you are allowed to conduct.
5. Alteration and Improvements
At times, you may need to redesign or make changes to the leased space to suit your business operations better. Consider checking the lease for any terms regarding alterations or improvements to the property. Some landlords may restrict any changes, while others might allow modifications but require the tenant to revert the property to its original condition at the end of the lease. So, before signing a commercial lease, understand the respective rights and responsibilities related to the property alterations.
6. Maintenance, Repair, and Compliance with Laws
Additionally, it is vital to clearly delineate who will shoulder the responsibilities for the maintenance and repair of the property. In-depth knowledge about who also handles other matters like compliance with health and safety regulations, business permits, and other legal responsibilities is necessary.
Some commercial leases stipulate that the landlord is responsible for all structural repairs while the tenant handles minor repairs and maintenance within the premises. However, the specifics can vary widely, hence the need for careful examination of the terms. Remember, maintenance and repair costs can sum up to considerable amounts, impacting the overall cost of leasing.
7. Exit Strategy
The future is unpredictable, and sometimes, despite best intentions and planning, things don’t always pan out as envisioned. You may decide to close shop, relocate, or expand, necessitating an exit from your lease. An exit strategy should include scenarios such as subletting or assigning the lease, breaking the lease, and the penalties involved.
Ensure that the lease provides some leeway for you to exit without much repercussion. Otherwise, you might end up paying a hefty price to terminate the lease. If the current terms are not in your favor, try negotiating for more flexible exit terms.
Conclusion
Signing a commercial lease contract (and the right one) is crucial for the success of your business. It ensures friendly terms for your operations and shields your business from potential pitfalls that can result from unfavorable leases. Therefore, when contemplating signing a commercial lease, it’s crucial to consider these seven key factors: the rent terms, lease duration, type of lease, allowable business activities, adjustment capabilities, maintenance and repair responsibilities, and finally – an exit strategy. By doing so, you are safeguarding your business while keeping the path clear for growth and prosperity. Remember to involve a professional during the negotiation and signing of the lease to ensure all your bases are covered.
