6 Tips for Negotiating a Commercial Property Lease without Getting Burned

While starting and growing a business can be challenging, one area in which the market is currently working in the business owners’ favor is in the glut of available commercial real estate.

If your business is new or simply in need of more space, the abundance of choice and favorable market conditions for potential tenants can prove an enticing prospect for budding entrepreneurs and small business owners. However, even in a buyer’s market, negotiating a commercial lease is a daunting and complex process that requires research and due diligence.

So you’ve found your perfect location, now what? Here are some tips for leasing a space for your small business.

Setting the Term of your Lease

The term and rent that you will pay is your first negotiation point.  The trick here is not to over-commit while giving yourself some flexibility for the long term. It’s generally recommended that small businesses negotiate one to two year leases with the option to renew should you need to. You’ll also want to factor in and negotiate rent increases over the term and renewal options so that you are not unexpectedly hit with a rent increase without warning from your landlord – something that can quickly compromise you cash flow and margins.

Remember to be prepared for pushback, a landlord is much more likely to favor locking you in for the long-term if they can by sweetening the deal. It’s a good idea to have a broker involved who knows the local market and what tricks and sweeteners the landlords are likely to offer! But remember the broker works for the landlord and gets commission on the total lease value. It’s worth talking to a good real estate lawyer before consulting a broker, they can often recommend the right choice for you and work consultatively with you as you negotiate your lease through the broker.

What about Expenses?

As with residential leases, commercial real estate landlords often tag on extras such as maintenance fees, upkeep for shared facilities (Common Area Maintenance or CAM), and so on.  What about utilities? These charges are usually the responsibility of the tenant, but how are they measured? Are they individually metered or apportioned by the square footage? Ask to see these “hidden fees” and policies as well as examples of costs that are typically incurred by tenants. 

Who Handles Maintenance and Repair?

While residential leasing often places the burden of maintenance and upkeep on the shoulders of the landlord, commercial leases are different. Just because the landlord owns the building, it would make sense to believe that they are responsible for repairs and upkeep – this is not the case. Commercial leases vary in their approach to this – some stipulate that the tenant is responsible for all property upkeep and repairs while others specify that the tenant is responsible for systems such as the air conditioning, plumbing , etc. Check your lease – in addition to stating who is responsible for what it may also contain dollar limits on how much the tenant must pay for maintenance and repair. An attorney can help clarify your legal rights.

Read the Lease

So it goes without saying, read over your lease in detail and hire an attorney who specializes in commercial real estate to go through the clauses and fine print.

Consider Building in Clauses to Protect your Business

To protect your investment and long term business interests, it’s worth investigating and negotiating some potential add-on clauses to your lease. These might include:

• Sublease – This builds in some flexibility so that should your business plans change you can sublet your space to another business.
• Exclusivity clause – Prevents the landlord from leasing any other premises on the development to a direct competitor of yours.
• Co-tenancy – If the development has an anchor tenant such as a known retail brand and that tenant closes, a co-tenancy agreement can protect you from a potential loss of custom by allowing you to break the lease if the landlord doesn’t replace the anchor tenant in a specified time period.

What if You Default?

Businesses get closed down without prior notice all the time because they defaulted on their lease. Protect your interests and your customers by knowing what you are agreeing to upfront. Will you be locked out immediately? Will the landlord initiate eviction proceedings? Can you negotiate more time for yourself should you default? If you default could you pay only the month’s rent owed as opposed to the remaining money owed on the lease? It’s worth investigating.

Have you negotiated a commercial lease? Share your experiences or post your comments below!

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Related SBA Programs

Have Equity in your Property but Struggling to Access new Working Capital? The Temporary 504 Refinance Program can Help

Market research shows that a large percentage of commercial mortgages outstanding are set to mature within the next few years, particularly those held by community banks.  As real estate values have declined, however, even small businesses that are performing well and making their payments on time can have a hard time refinancing these loans and may need to restructure their debt.

Under the Small Business Jobs Act, the SBA is currently implementing a temporary 504 Refinance Program—authorized until September 27, 2012—that allows small businesses to refinance eligible fixed assets in its 504 program without requirement of an expansion. This program provides small businesses the opportunity to lock in long-term, stable financing, and finance eligible business expenses as well as protect jobs.

Beginning October 12, 2011 borrowers can finance up to 90 percent of the appraised value of available collateral, which could include fixed assets acceptable to SBA (for example:  commercial or residential real property).  This allows borrowers with more than 10 percent equity to be able to obtain additional proceeds to pay for eligible business expenses.

Learn more about the program here: 504 Loan Refinancing Program

Additional Resources

• Choosing a Business Location and Equipment – From tips for choosing a business location to zoning laws and buying government surplus, this useful guide from the SBA can help inform the decisions and investments you make.
• Leasing Commercial Space – A guide for small businesses from the SBA.

About the Author

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed.