New entrepreneurs or business owners who have never negotiated a commercial lease are in for a world of trouble if they enter negotiations thinking that such leases work like apartment leases. This could not be further from the truth. According to the Huffington Post, there are multiple clauses in a business lease. There is no clause that cannot be negotiated, and there is no such thing as a “standard business lease.”
Since the negotiation of a commercial lease can be a crucial factor in the success of a business, Joseph Zoppo has provided the following information about the ins and outs of commercial business leasing in order to understand how a business owner can walk away with the best deal possible. Attorney Zoppo has a unique perspective on commercial leasing because he has worked as an attorney and also as a real estate broker and a banker. Zoppo has experience in commercial litigation, merger and acquisition defense, corporate and real estate business transactions, loan workouts and refinancing deals.
Types of Commercial Leases –
According to Forbes Magazine, there are four different types of business leasing arrangements between the landlord and tenant business. Each one has the landlord and business owner covering a different portion of the building expenses.
The types of commercial leases are:
Single Net Lease –
The business owner pays for the utilities and property tax only. The landlord covers all repairs, insurance, and the maintenance costs of the building.
Double Net Lease –
The business owner must pay for utilities, property taxes and insurance. The landlord covers the repairs and maintenance for the building.
Triple Net Lease –
The business owner pays for all building costs, except the landlord will pay for any structural issues the building needs.
Full Service Gross Lease –
The structural repairs and all operating costs are split between the landlord and the business owner.
Forbes stated that the danger of a full service gross lease is that the business owner is liable and can be saddled with expensive repairs if something happens from within their leased location that harms the rest of the building or the surrounding community. An example would be a fire that was sparked by a faulty electrical device in your leased office that totals your office and several other offices in the building. Under a full service gross lease, you would be liable for repairing all of the damage, not the landlord. For this reason, many business owners are willing to pay a bit more in their lease in order to have the landlord cover any potential repairs.
Some Important Items to Negotiate –
Option to Sub-Lease –
Nolo Press stated that business owners need a way to get out of the lease if it is not working for them or in the event of business decline or failure. One possible clause is an option to sub-lease the space. Another possible clause to negotiate is the option to sell the business and assign the lease. The wording would have to allow the landlord to provide permission for this in writing. Also, the business owner needs to have the contract include additional wording that the landlord agrees to provide such written permission and not “unreasonably withhold” such permission.
Cap on Lease Increases –
Nolo also stated that landlords like to raise the lease amount every year. Sometimes, the best a business owner can do is negotiate for a maximum amount for such increases.
Occupancy Date Versus Date Payments Begin –
According to The Balance Careers, sometimes a business owner can negotiate that the payments don’t begin until a specified time after the occupancy date. This allows the business owner to make any improvements to the space and actually be open for business before they begin making payments.
One Big Negotiation Tip –
Have Two Commercial Leases in the Fire –
According to Attorney Zoppo, a business owner will have a stronger hand if they are simultaneously negotiating two leases. This provides them the opportunity to walk away from the less favorable agreement. The other good news is that, in many areas today, there are more commercial vacancies, so that favors the business owner with good negotiation skills.
Two Huge Caveats –
Attorney Zoppo advises that you need to ensure that your business is even approved in the location you are attempting to lease. Zoning laws are strict and can throw a curveball at business owners. You need to check with your city’s planning department for this information in advance of negotiating a lease.
Termination Clause –
Also, Zoppo says it is important that the termination clause of the lease agreement does not kick your business out if you miss a payment by one day. There needs to be a bit of relief built in so that you can make up a missed payment in a fair and reasonable fashion.
Commercial leasing is complex. There are entire books written on solely this topic. It is beyond the scope of this article to fully inform business owners how to negotiate leases to their full advantage. Joseph Zoppo advises business owners to seek advice from a highly qualified lawyer who is experienced in commercial leasing. Not understanding what is in a commercial leasing contract and getting a bad surprise can cost your company thousands of dollars.
“This article is not intended to constitute legal advice or the provision of legal services. By posting and/or maintaining this website and its contents, Peres, Zoppo, and Associates do not intend to solicit legal business from clients located in states or jurisdictions where Peres, Zoppo, and Associates or its individual attorneys are not licensed or authorized to practice law.”