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6 Key Things to Consider When Leasing Commercial Property

January 30, 2020 Marwa Elzankaly

Leasing commercial space differs from renting a home. Whether you need office, retail, or industrial buildings for your business, commercial properties have their own unique issues, which must be addressed early on. A proper lease ensures you are able to run and grow your business effectively without unreasonable restrictions or interruptions from the property owner. A well-negotiated (and drafted) commercial lease may also help avoid litigation – or at least put you in the best position if it is inevitable. 

Here are some key terms to consider:

Rent:  The details surrounding your rent payments are important. For example, maybe the space will require renovation to fit the needs of your business. Some property owners will agree to a reasonable “grace period” to complete those renovations before payment of rent begins. Another question about rent is how long you must continue to pay rent at the end of the lease. Tenants are sometimes required to remove changes to the building and restore the property at the end of a lease. If that work takes longer than the term of the lease, it is important to clarify whether you are obligated to continue paying rent until the restoration work is complete. As far as the rent, the amount per square foot is one element. There may also be additional charges, usually representing monthly costs associated with the property that landlords will try to pass on to the tenant, such as property insurance. Be clear exactly how much you are paying each month, and for what.    

Tenant Improvements:  As mentioned above, you may have to make changes to the building before moving in to suit the needs of your business. These are called “tenant improvements.” Negotiating tenant improvements before committing to any lease is critical so you do not end up stuck with a space you cannot adequately use.

For example, it is important to be clear about: the condition of the building to be leased; the types of improvements the tenant will make to the building and how much control the tenant has over improvements; whether the landlord will pay for any of the improvements, especially if they may raise the property value; who owns the improvements; the process for completing the improvements, including preparing, approving and submitting plans to the City for permitting and for choosing contractors; and whether any of those improvements must be removed and the property restored at the end of the lease. 

Alterations During Tenancy:  Most commercial leases are long term leases – five, ten or even twenty years. With time, your business may grow or change, and you may need to make further alterations or improvements to the property. It is important to address making changes to the building during your tenancy at the outset so you do not find yourself unable to tailor the building to suit your business needs. Thus, be sure and address issues such as: the changes that require landlord approval; some standard for approval so that a landlord cannot unreasonably withhold approval of an alteration that is necessary to your business; and of course, the process for approval and for completing any alterations.

End of Lease/SurrenderAs mentioned above, it is important to be clear about the state of the building before you move in and which of your improvements or alterations to the building must be removed and restored when you move out. Depending on the extent of the improvements, this may necessitate a long process of working out the restoration work with the landlord. Thus, any commercial lease should have provisions governing the process for approving and completing pre move-out restoration work, including some timeline to avoid having the property owner unreasonably drag out the process while the tenant continues to pay rent. Be sure you are not obligated to make repairs for things that are a result of “ordinary wear and tear,” (usually the property owner’s responsibility), or to make renovations really intended to make the property “market ready” for the next tenant (another property owner responsibility).   

Landlord Accessibility:  Near the end of the tenancy and during a pre move-out restoration process, the landlord might want to begin marketing the property and give potential tenants tours while you are still in the building. Be sure you are clear about any obligation to allow access to the building, or to cooperate with the landlord in their efforts to re-lease the property.

Insurance:  Be clear about who is obligated to maintain what type of insurance. Landlords will often keep a property insurance policy (but will pass on the cost to the tenant). Landlords, however, sometimes require tenants to keep liability policies or other policies relating to their business.

On a final note, hiring a real estate broker, experienced in commercial leases, will help. However, consider consulting counsel before signing a commercial lease as an attorney will be able to advise you whether the language in the lease accurately reflects the terms of your agreement. Investing the time and resources in doing so at the outset may help you avoid trouble later on.