Companies and businesses almost always need space. Whether it is an established company’s large headquarters or a startup’s first office space, most companies will at some point encounter a commercial lease. With the average long-term lease lasting between five and ten years, a new lease often means a new company home. Just as a person would furnish and decorate a new house, a company should lay the groundwork for a comfortable commercial leasing experience. They can do this by ensuring the terms are favorable and precisely negotiated. Since commercial leases can involve large business expenditures, it is important to keep an eye on the fine print so that your company’s new base is sitting on the best possible legal foundation. Here are a few key tips for companies and entrepreneurs to keep in mind as they negotiate commercial leases:
1. Know who is responsible for any damages. Commercial leases can be beefy, long-form contracts with a ton of fine print. In negotiating a lease, companies should pay attention to which party bears the burden for any damages. If the cost of repairs is not explicitly dealt to one party, the tenant will likely have to absorb the cost him- or herself. Before signing, potential tenants should go over the lease agreement with a lawyer who can make sure the terms work in their favor.
2. Beware of escalation clauses. An escalation clause is a line in a contract that gives the landlord power to raise the rent as time goes on. Not all commercial leases include escalation clauses, but they are common. While potential tenants may be inclined to leap for a property with low rent, the rise in rent over the course of a ten-year lease could end up costing more than the tenant bargained for. Escalation clauses can typically be negotiated and companies should seek a lawyer to negotiate a favorable escalation clause.
3. Look for defects in the property. Not all defects might be visible. Potential tenants should check to make sure the space is adequately wired for their business needs. Can the space support the requisite amount of technology for your business? Are the air conditioning systems in proper working order? Does the space satisfy all your company’s needs? In many jurisdictions, a tenant will be responsible for any re-wiring costs or construction costs necessary after they have taken possession of the property. In other words, tenants should make sure that all the necessary improvements are made before they sign on the dotted line.
4. Check for hidden costs. The rent is not the only expense that is built into a commercial lease. Various other expenses could be peppered in throughout the agreement. For example, some leases might include common area maintenance expenses. This kind of provision requires the tenant to pay their corresponding share for the maintenance of shared areas in a multi-tenant building. Potential tenants should be careful with these kinds of provisions because landlords have extended this kind of clause to include many unexpected kinds of expenditures. When signing a lease, be sure to examine any common area expenses to make sure you don’t get stuck with an unfair bill.
5. Determine whether there is a kick-out clause. A kick-out clause in a commercial lease is a term that allows a landlord or a tenant to break the lease if a particular condition is not satisfied. This type of clause sometimes allows a landlord to evict the tenant from the property if the business is less profitable than predicted. Conversely, a kick-out clause can also be crafted to allow a tenant to leave the property before the lease is over if it turns out the space no longer suits their needs. For instance, if a tenant leases property for a storage business and subsequently outgrows the space, a kick-out clause could empower them to move out early. This kind of clause won’t be applicable in every kind of commercial lease. But when they appear, kick-out clauses can dole large amounts of power to either the landlord or the tenant. Before signing a lease, companies should check to see whether a kick-out clause is present and whether it works in their favor.
Signing a commercial lease is an important step for the success of a business. The legal landscape for commercial leases presumes that potential tenants are more informed and powerful than tenants seeking residential leases. As a result, there are fewer legal protections in place for commercial leases. Navigating these transactions with some legal oversight can help new and well-established companies ensure that their commercial lease is a success so they can go ahead and make themselves at home.