A commercial lease for office or retail space is a significant financial commitment for your company. Companies make errors all the time, with the following seven being the most prevalent.
A commercial lease for office or retail space is a significant financial commitment for your company. They are normally five-year contracts, rent is commonly your second-largest monthly expenditure after payroll, and the rights and constraints in your lease agreement have a significant impact on your capacity to grow, contract, and move your firm.
Large and small businesses alike may make costly blunders when planning for new space and negotiating the lease – these are the most typical.
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1. Failure to Allocate Enough Time
In the commercial real estate market, it is common practise to allow six to twelve months to conclude a contract for less than 10,000 square feet and nine to 18 months for bigger projects. Due diligence of potential locations, lease negotiation, planning and design of your new space with an architect and engineer, bidding out and awarding the construction work required to customise the space (known as a “fit-out”), obtaining construction and business permits, and completion of the fit-out itself all require time.
Equally crucial, the lease start date must take these actions into consideration. Otherwise, you’ll be paying rent on your new place before you’ve even moved in. You’ll also need to coordinate your plans with your present landlord by providing enough notice of your relocation and arranging a rent agreement for any time you stay in your current place beyond the duration of your current lease expires (known as a holdover).
2. Inadequate Planning
Failure to appropriately design your new place is closely tied to the lead time problem. The location and style of your facility should be driven by how you wish to do business; your real estate should not dictate how you conduct business.
You must consider how much room you need as well as if you require any specialised space (reinforced flooring for heavy equipment? a data centre? backup energy?). An expert architect and a skilled tenant broker/representative can assist your top management in considering all of the important problems, such as:
How will you organise the relocation of all of your company processes, including technology and employees?
Who will make choices on the ongoing project (a committee or a single individual)?
What type of corporate image do you want to create, and what kind of office space can help you achieve it?
What proportion of collaborative office space to private office space is appropriate for the way your company operates?
What is your financial situation?
What kind of space arrangement makes sense in terms of potential growth? (For example, how much more room could be required in the next three to five years? Is there a chance of downsizing?)
3. Absence of Representation
A “standard commercial lease” does not exist. Landlords – the building owners and their property managers – do not construct contracts with your best interests in mind, and commercial real estate transactions lack the legal consumer protections found in apartment leases. Most commercial leases include specialised financial terms and legal requirements that are difficult to grasp, and most business people lack the experience to adequately examine and negotiate a lease arrangement.
You’ll need an experienced commercial real estate lawyer allowed to practise in the state where the property is situated, ideally one who has already worked with your landlord (or your landlord’s lawyer). You should also carefully consider hiring a tenant broker/representative, who is a consultant who solely represents commercial tenants in leasing negotiations (rather than building owners or property managers). A skilled tenant representative will be familiar with the state of your market (such as the current “market rent” per square foot in your city), the existing and upcoming vacancies in the buildings you are considering, and the best approach to negotiate with the landlords of such buildings.
4. Inadequate Due Diligence
The physical and legal status of your company’s space might have a considerable impact on your business operations, therefore you should investigate the facts to protect yourself. Aside from analysing the proposed lease, your real estate attorney should also:
Confirm that your company’s activities will be permitted by the building’s zoning.
Engage a title firm to provide a report detailing the building’s liens, mortgage lenders, and any current legal claims.
Your architect and engineer should check the building’s electrical, plumbing, and HVAC systems, as well as assess the space’s compliance with building rules, fire and safety standards, and handicapped person access legislation, in addition to planning and creating your new space. Your architect should also verify that the rented space has the square footage specified by the landlord.
5. Failure to Understand Critical Lease Provisions
This is the duration of the lease, including the start and end dates. This, like everything else in a business contract, is not as simple as you may believe.
Does the term begin when you sign it or when you begin operations in the space (i.e., when the fit-out construction is completed)?
Even if rent isn’t due until you move in, is your company responsible for building insurance and maintenance fees from the start?
A provision labelled “Term” may be found at the beginning of the lease. This clause sets the start and end dates of your lease and explains its duration.
How is the Term extended – does it happen automatically or just when a party provides notice?
Is it possible for you or the landlord to stop the Term early?
In most commercial leases, the computation of rent and other tenant costs is intricate, which may lead to some unpleasant shocks over the lease period if the conditions are not completely understood at the outset.
The following are some examples of frequent rent structures:
The tenant pays just their fraction of the utilities and property tax (determined by the proportion of space rented in the building), but the landlord pays for all upkeep, repairs, and insurance.
Net-net, or double net lease: The tenant is solely liable for its part of the building’s utilities, property taxes, and insurance premiums (again, dependent on the proportion of space leased in the building), with the landlord covering all maintenance and repairs.
Triple net leases: The tenant pays its share of all building expenditures, with the exception of structural repairs, which are normally the landlord’s responsibility.
Full service gross lease, also known as modified gross lease (sometimes known as modified net lease): The tenant and landlord agree to divide structural repairs and running expenditures (property taxes, insurance, common area upkeep, and utilities), with the tenant’s part referred to as “base rent.”
Percentage lease: This sort of lease is almost solely used for retail space leasing, and it indicates that a part of the rent is computed as a percentage of the tenant’s client sales at the property.
Furthermore, you must have comprehensive information on how and when rent may be raised – both annually and cumulatively throughout the whole Term.
Deposit for Security
A business landlord, unlike a regular apartment contract, may demand more than two months’ rent in cash. It might be whatever amount the landlord believes is required depending on your company’s creditworthiness. This will be a major problem for the landlord if you are a fresh new firm with no operational history.
The landlord may also request a security deposit in the form of a bank-issued Letter of Credit. With an LC, your bank puts aside a part of your cash so that the landlord has an easy recourse if you fail to meet your lease payment requirements (the landlord does not have to sue you in court).
Enhancements and Modifications
If the new facility requires renovations or customization for your business (a “fit-out”), the lease must clearly address these difficulties. You’ll need to discuss who conducts the space design work, who does or controls the construction, if there are strict completion targets, and who pays for it. It is also critical to negotiate an agreement on any rent payment responsibilities that may arise throughout the fit-out.
Signs and Parking
Day-to-day specifics of the lease might also be crucial. Is it true that renting space in the building entitles you to a certain number of parking spaces? Do you have to pay for extra parking places if you need them? Where can you put up signage identifying your company? Do they have to be created in a certain way?
How will a disagreement between your company and the landlord be resolved? Is there a time limit for negotiating? Do the parties have to go to mediation (which is normally less expensive than going to court) or may they sue each other right away? During a significant disagreement, are rent obligations suspended? Can you deduct a part of the rent to cover the expense of the disputed issue?
6. Failure to Focus Lease Negotiations on Critical Business Issues
Prospective renters should not concentrate just on the rent and other payment conditions; other critical lease stipulations might be much more important to your company’s future. It is critical to ask and answer the following questions:
How much notice must the landlord entity provide if it want to transfer your space to another portion of the building?
Can you sublease or assign a portion of your lease if your company grows?
Can you get more space in the building if your company grows?
Is it possible to terminate the contract and relocate to a different building if there is inadequate available expansion space?
If you wish to remain in the building, can you renew your lease?
Can you transfer the lease to a buyer of your company?
Is the lease still valid if your company changes hands?
7. Neglecting Negotiation Leverage
A tenant representative will be familiar with the current status of the real estate market in your city as well as the current position of your specific landlord. Is the landlord, for example, in need of tenants? Is a large tenant set to leave, resulting in a huge vacancy in the building? Or does the landlord have a facility that is completely leased indefinitely? Without this information, your firm will have no idea how much bargaining power you have or what kind of incentives your landlord is ready to provide to sign a new tenant.
Landlords will often agree to:
There are times when no rent is due (so called “free rent”).
Discounted rent periods.
Contributions to the expenses of the tenant’s space fit-out.
Make whatever renovations to the building that the renter desires or requires.
Annual rent increases are limited to a certain amount (including the portions tied to building expenses).
Furthermore, landlords are often convinced that no personal guarantees from the tenant’s owners or key shareholders are necessary to back up the lease’s payment commitments. Provided a guarantee is needed at the start of the lease, landlords may occasionally agree to let it lapse after a few years if you have a consistent payment history.