For the vast majority of small businesses, the company’s first and only real estate transaction is entering into a lease for commercial space. Whether you are considering office, manufacturing or retail space, the following four tips will help you navigate the negotiation process so you can avoid any unpleasant surprises or costly mistakes.
Read the Lease
Don't laugh. You would be amazed at how many clients will sign a lease without ever taking a look at it. I would even go a step further though. Yes, it is important to read the lease, but just as important is to understand all of the terms of the lease. If it doesn't make sense, ask a real estate person or lawyer to explain it to you. Remember, it's better to know what you are getting yourself into instead of trying to get yourself out of it later.
“Base Rent” is Not the Only Rent You Will Pay
Most prospective tenants focus their negotiation efforts on the “base rent,” the fixed monthly amount you will pay under the lease agreement. You may have negotiated a terrific deal on the base rent, but the transaction may not be the best value once other charges are factored in. For example, the majority of commercial lease agreements are “triple net,” meaning that the tenant also must pay for insurance, taxes and other operating expenses. When negotiating “triple net,” ensure you aren’t being charged for expenses that do not benefit your space, and that you are paying an amount that is in proportion to the space you utilize in the building. Another provision to watch for is “percentage rent,” in which a tenant pays a percentage of revenue in excess of a specific amount. This may not be a bad thing, as it provides the landlord with an incentive to help ensure your company is successful.
There’s No Such Thing as a “Form Lease”
Most commercial property owners and managers offer prospective tenants a pre-printed lease containing your name and various terms. They often present these documents and adamantly explain that it is the landlord’s “typical form lease.” This, however, does not mean you cannot negotiate. Review every provision in the agreement, bearing in mind that all terms are open for discussion and negotiation. Pay particular attention to the specific needs of your business that are not addressed in the “form lease.”
Note the Notice Requirements
Your lease agreement may contain many provisions that require you to send notification to the landlord under various circumstances. For example, if you wish to renew or terminate your lease at the end of the term, you will likely owe a notice to the landlord to that effect, and it may be due much earlier than you think – sometimes up to a year or more. Prepare a summary of the key notice requirements contained in your lease agreement, along with the due dates, and add key dates to your calendar to ensure you comply with all notice requirements and do not forfeit any rights under your lease agreement.
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Many & LoCoco
Attorneys at Law