Negotiating a Commercial Lease
Unlike run of the mill residential leases, many terms of commercial leases are usually negotiable, although your leverage in the negotiation will be affected by your real estate knowledge and the current rental market. For example, if there is a surplus of commercial space available in your preferred area, you will likely have more leverage to negotiate terms with a prospective landlord. Similarly, having confidence in and being informed about the terms of the lease, strength of the market, and desirability of the property, you will also work in your favor during negotiations. In negotiating a commercial lease, common negotiating points include the rent, rent increases, lease term, common area operating expenses, and sublease and assignment terms.
Negotiating a Commercial Lease: Rent Payment and Increases
Although landlords generally do not lower the rental prices they offer, they may consider reduced rent, i.e., rent concessions, to compensate for moving costs, tenant improvements, or caps on rent increases. Commercial lease agreements almost always contain an annual percentage increase on rent. The amount of the annual increase is often negotiable, as is a cap on the percentage increase. If the lease space needs a lot of improvement, this may be used to lower rent or support a request that the landlord cover certain improvements.
More complicated commercial leases, such as leases with rental provisions that include percentages of net sales as a component of the monthly rental amount, are often subject to more intensive negotiations where the tenant and the landlord would look to balance the benefits of a lower base rent against the potential for high returns from sales figures.
Negotiating a Commercial Lease: The Term of the Lease
Depending on whether you are a commercial landlord or tenant, you may prefer either a short or long term lease. Generally, a tenant will prefer a short-term lease, which will allow more flexibility. A commercial landlord will usually prefer a long-term lease, ensuring steady rent for a period of years. Commercial tenants negotiating a commercial lease who have a location-sensitive businesses often find that long term leases are more beneficial because they can rely on the affordable business space for a predictable period of time, and the stress of moving frequently is eliminated. In addition, a long term lease generally allows tenants to lock in more favorable rental rates. A common way to balance the competing benefits of long term and short term leases is to negotiate option rights, i.e., the right to renew the lease for successive terms.
Negotiating a Commercial Lease: Subleases or Assignments
The right to sublease or assign a space is also negotiable. Tenants usually seek this right to protect themselves from being locked into a space when business needs require the tenant to move. Landlords sometimes will agree to a sublease or assignment in order to make sure their property is filled, but some either specifically prohibit or restrict such rights to protect the quality and type of tenants. Granting the tenant sublease and assignment rights subject to the landlord’s “reasonable” discretion and approval is a good way to reach a reasonable compromise on these issues.
If you have any questions about negotiating a commercial lease, contact an experienced attorney. Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. Contact us at (310) 277-7747 to see how we can help you with your business or real estate.