The 8 Most Important Components of a Commercial Real Estate Lease Negotiation

by Mike Kushner, CCIM

As a tenant needing commercial real estate space to run your business, it can be challenging to navigate the many twists and turns of the market. You need to find the perfect space for your growing business, and then negotiate and enter into a favorable lease agreement. Your commercial real estate lease can have a large impact on the success of your business, or it could cause many headaches. To ensure you’re getting a fair and favorable lease, let’s look at some of the most important things (aside from price!) that typically pop up in a commercial lease.

Terms of the Lease

One of the most important pieces in a commercial real estate lease, short of the price, is the duration of the lease and how the timing is structured. You want to be sure that you fully understand when your lease begins and ends, especially if the landlord is making improvements to the space prior to you moving in. A landlord may provide more favorable pricing or terms when entering into a lease that has a longer duration. While this is helpful from a budget perspective, be sure that you will want to stay in this space for that amount of time.

Lease Renewal

Another important component of your lease is when and how the lease will renew. When your current lease agreement expires, a landlord may want it to automatically renew. As a tenant, you will want to be aware of this well in advance so that you have options to exit the lease on time. Additionally, look to see if the lease specifies a change in price upon renewal. Sometimes, there will be increases that can hit you unexpectedly if you weren’t paying attention.

Lease Termination

Be sure that you know the terms and penalties for breaking your lease. While it may not be your intention to break the lease early, various factors which impact your space needs could make that necessary. If the lease imposes a steep monetary penalty for breaking the lease early, you may want to negotiate that down to more reasonable terms.

Environmental Concerns

Some commercial real estate leases may specify that a tenant may not store any hazardous materials on the property. This is not typically an issue unless your company deals specifically with hazardous materials – then you may want to consider finding another space. If you don’t deal with hazardous materials, you may want to ensure the lease includes a warranty from the landlord that the premises are free of them. If your business plans to use the commercial space for storage or production of consumable goods, you probably will want assurances that your inventory isn’t likely to be contaminated.

Insurance

Be sure to check the required minimum coverage for a tenant’s liability insurance. Typical coverage minimums are $1 million per occurrence and $3 million in the aggregate. If the lease specifies higher minimums at a price that is concerning or unreasonable for your business, you will want to include this as part of your negotiations.

Maintenance

A commercial real estate lease should outline who is responsible for the repairs and maintenance of building systems, including HVAC, electrical, and plumbing. If the lease places responsibility solely on the tenant, you may wish to renegotiate this. In a situation where the tenant is only leasing a small percentage of the overall building space, it’s unusual for a tenant to assume the costs of repair and maintenance for things that impact more than their rented space.

Defaulting

Closely review the language in the lease regarding delayed or missed rent payments. It is reasonable to request at least one written notice during any 12-month period (to account for a reasonable mistake), as well as a 5-day grace period for rent payments.

Relocation

Some commercial real estate leases may include a section about relocation. Does your lease grant the landlord the right to relocate you as they see fit? Under what terms? Pay attention to this as it could greatly inconvenience you if it ever takes place. You may also want to consider what happens if you want to relocate to a different space within the property in the future. Does this count as completely breaking the lease, or are there favorable terms you can agree upon to allow for your move?

While this is by no means an exhaustive list of components to consider, it should be a helpful starting point. What’s most important is to review every document closely, ask for clarification, and seek professional tenant representation early in your process. Having exclusive tenant representation on your side will provide an added layer of knowledge, experience, and protection that will put your business in the best position to negotiate a fair and favorable lease.

Are you preparing for a commercial real estate lease negotiation or renewal? Contact us today to meet with one of our tenant representation experts, so you can ensure you’re getting a fair deal.

This article was originally published on the Omni Realty Group website by Mike Kushner, CCIM. Omni was an exclusive buyer agent/tenant rep commercial real estate firm owned by Mr. Kushner prior to his joining the Capstone Commercial team. It has been adapted and reposted with permission. See the original article here.

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