Whether you’re launching a new company and searching for your first brick-and-mortar location, or a small-to mid-sized business (SMB) planning to scale or branch out, finding the ideal commercial space can play a crucial role in the long-term viability of your business. Even more significant than the space itself, however, are the terms and conditions of the underlying lease. Negotiating these important details can be a time-consuming and stressful process. The good news is that you don’t have to navigate this nuanced process on your own. Love Law Firm has years of experience advising New York business owners successfully negotiate favorable commercial lease terms that simultaneously mitigate risk and protect your bottom line. Here are the top X tips to help lock in the best commercial lease terms.
Give Yourself Time
Allocate between six to nine months to finalize a new commercial lease. While this may seem a bit excessive, there is a lot to accomplish including:
- Locating an ideally situated space
- Negotiating favorable terms and conditions
- Obtaining required regulatory permits
- Completing renovations and improvements
- Updating business office services (e.g., mail, internet, phone, etc.)
- Furnishing and equipping new space
- Finalizing insurance coverage for new building
- Completing the final move
The goal is avoiding the unenviable situation where you’re pressed for time and subsequently forced to make uninformed decisions or accept less than ideal lease terms. In the event you have an existing lease, you should try to work in as much lead time as you can in order to secure a new lease. The majority of commercial leases have a ‘holdover’ clause that means you will have to pay escalated fees if you fail to vacate the premises before the lease expiration date. It’s not uncommon for these fees to be double or event triple the normal monthly rate.
Have an Exit Plan
One of the biggest sticking points from a tenant’s perspective during commercial lease negotiations is implementing an option to either terminate, renegotiate or relocate prior to the expiration of the lease if circumstances arise that make such a move necessary. There are different options based on your unique situation:
- Termination: A lease can include a termination agreement in which the tenant must provide a certain number of months’ notice they will be terminating their lease and/or the tenant pays a one-time cancellation fee in exchange for being released from the original lease agreement.
- Assignment & Sublease: This contractual language means that if you are able to find a suitable replacement tenant you can be released from the lease without penalty.
- Right of First Offer: If your landlord operates other commercial office spaces, this provision will allow you to effectively transfer the lease to an alternative space if the structure of your business changes significantly over the lease period.
Watch Out for Hidden Costs
On top of the standard rent, commercial lease agreements commonly include additional fees for maintenance, cleaning, utilities and taxes. Business owners need to know exactly what costs they are obligated to pay to determine if a given property is financially viable. There are five general types of leases:
- Net Lease: Tenant pays the base rent and one of the following:
- Property Tax (most common)
- Double Net Lease: Tenant pays base rent, a portion of the property taxes, utilities, insurance premiums and cleaning services for the premises. The landlord covers structural renovations and maintenance.
- Triple Net Lease: Tenant bears responsibility for all operating expenses with the exception of structural rehab costs.
- Percentage Lease: Common in malls and other multi-tenant properties, in which tenant pays base rent and a share of monthly sales over a certain threshold to cover communal costs.
- Gross Rent Lease: Tenant and landlord split property costs equally.
Note that the base rent for commercial properties usually increases by a certain percentage annually. To speed up the negotiation phase, tenants often consent to rent escalations for each successive year to be negotiated by the parties every year based on the current fair market value. While this contractual language may be more efficient, it is beneficial for the tenant to insist that the specific prices be explicitly stated in writing from the start. This will give you leverage in future negotiations to obtain competitive prices.
Consider the Long-Term
Startup and SMB owners typically prefer the flexibility of shorter-term leases, opting not to commit themselves to a property for several years as they continue to develop their corporate strategy. It may pay off in the long run to rethink this common approach. Commercial property owners generally favor extended leases and may be more willing to accept tenant-friendly concessions in exchange for the stability of a longer-term occupant. Landlords may offer lower monthly rent, perform additional renovations or even offer completely free months of rent for tenants willing to lock in a property for multiple years. If you have the option of negotiating early termination or lease modification clauses as previously mentioned, this move could save you thousands in rent over the course of the lease.
Call in the Pros
The fees associated with a broker in New York commercial lease agreements are generally the landlord’s obligation, which means you can take advantage of the services of an experienced broker to find a property and negotiate lease terms at no additional cost. Typically, brokers are compensated a percentage of the annual rent, meaning the higher the base rent, the more they make. Therefore, tenants should be proactive during lease negotiations and ensure the broker clearly understands your bottom line. Also be sure to talk with your broker about certain tax abatements that may reduce your rent in some areas of New York City. It is advisable to then consult with an attorney who can analyze the finalized lease agreement to ensure that all terms are reasonable.
Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.