Top Tips When Signing a New Commercial Lease

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Top Tips When Signing a New Commercial Lease: What Tenants Should Look Out For

Signing a commercial lease can be an exciting moment for any business. Whether you're setting up a new office, opening a retail store, or expanding your operations, the space you choose plays a vital role in your business's success. However, signing a lease is a big commitment, and it's essential to understand what you're getting into. Many business owners rush into agreements without fully understanding the terms, only to face unexpected costs or limitations down the line.

As a tenant, you have the opportunity to protect your interests and avoid unnecessary headaches by being vigilant when reviewing your lease. Below are the top tips for what to look out for when signing a commercial lease.

1. Understand the Lease Type

Commercial leases come in various types, and understanding which one you're signing is key to knowing your financial obligations. The most common types of commercial leases include:

• Gross Lease (Full-Service Lease): The tenant pays a fixed rent amount, and the landlord covers operating expenses such as property rate & taxes, insurance, and maintenance.

• Net Lease: The tenant pays a base rent plus some or all of the additional costs associated with operating the property, like taxes, insurance, and maintenance. There are several subtypes of net leases, including single-net (N), double-net (NN), and triple-net (NNN) leases, with each requiring different levels of financial responsibility for the tenant.

• Percentage Lease: Primarily used in retail, tenants pay a base rent along with a percentage of their business's revenue.

Ensure you fully understand the type of lease you're signing and how it will impact your monthly costs.

2. Pay Attention to the Rent Structure

While the base rent is the headline figure, commercial leases often include other costs that can significantly impact the total rent you pay. Always check:

• Rent escalation: Many leases include clauses that allow the landlord to increase rent annually or periodically, often based on inflation or a fixed percentage. Ensure you're aware of how often rent can be raised and by how much.

• Common area maintenance (CAM) charges: If you're leasing space in a multi-tenant building, you may be responsible for a portion of the costs to maintain shared spaces (hallways, parking lots, etc.). These charges can be unpredictable, so it's wise to ask for an estimate and understand what's included in CAM fees.

Understanding how rent is structured helps you plan your business's cash flow and prevents unpleasant surprises later.

3. Negotiate the Length of the Lease

The length of the lease term (also known as the "lease duration") is a critical factor in your decision-making process. A lease that's too short may leave you scrambling to find a new location at the end of the term, while one that's too long may trap you in a space that no longer fits your needs.

• Short-term lease (1-3 years): Offers flexibility if your business is growing or uncertain about its future space needs. However, be cautious of rent hikes when it's time to renew.

• Long-term lease (5+ years): Provides stability and the chance to lock in favorable rental rates for the long haul, but it may not be suitable for businesses expecting rapid growth or changes in their needs.

When negotiating the lease length, also consider renewal options. A well-negotiated renewal clause can give you the option to extend your lease at a predetermined rate, providing security while keeping your future options open.

4. Check the Use Clause

The "use clause" in a commercial lease outlines what type of activities can be conducted on the premises. It's crucial that the lease aligns with your business activities and provides enough flexibility for future changes.

For instance, if you lease a space for a restaurant, but the use clause restricts you from adding outdoor seating or selling alcohol, this could impact your business model.

Additionally, if your business expands or shifts its operations, you want to ensure the use clause is broad enough to accommodate those changes without violating the lease terms. Look for restrictions on hours of operation, signage, or specific services offered.

5. Review Maintenance and Repair Responsibilities

Commercial leases often specify who is responsible for repairs and maintenance, and this can vary significantly depending on the lease structure. It's important to clarify which party is responsible for different aspects of property upkeep, including:

• Structural repairs (roof, foundation, walls)
• HVAC systems, plumbing, and electrical
• Common areas and parking lots
• Regular maintenance (cleaning, landscaping, pest control)

Landlords typically take care of structural repairs, but tenants are often responsible for internal maintenance and repairs. Some leases include a "repair and deduct" clause, allowing tenants to make repairs and deduct the cost from rent if the landlord fails to address issues within a reasonable time. Understanding your obligations can save you from unexpected repair bills.

6. Understand Subletting and Assignment Terms

There may come a time when you need to move to a larger space or close down a location before your lease term ends. In this case, you may want to sublet the space to another tenant or assign the lease to a new party.

Most commercial leases contain restrictions on subletting and assignment. Landlords usually reserve the right to approve or deny potential subtenants or assignees, which can limit your options if you want to exit the lease early. Be sure to review these terms and negotiate for flexibility, such as allowing subleases with landlord approval that cannot be unreasonably withheld.

7. Watch for Hidden Fees and Costs

Hidden fees are a common trap in commercial leases, and tenants should be vigilant when reviewing the fine print. Some common additional costs include:

• Insurance: In many leases, tenants are required to carry insurance (liability, fire, etc.), and these costs can vary widely.

• Utilities: Make sure you know which utilities you are responsible for. In some cases, landlords bill for utilities in addition to rent.

• Property Rates escalations: Be aware of any clauses that allow landlords to pass on increases in property rates to tenants, especially if you're in a market where rates tend to rise.

Request a detailed breakdown of all costs and fees upfront to avoid any surprises later.

8. Consider the Exit Strategy

Even if you plan on staying in your new space for the long term, it's always a good idea to have an exit strategy. Look for clauses in the lease that outline early termination conditions. These might include break clauses, which allow you to exit the lease under certain conditions (e.g., after a certain period or in the event of financial hardship).

9. Get Professional Help

While reviewing your lease on your own is essential, there's no substitute for professional guidance. Commercial leases are complex legal documents, and there can be nuances that only an expert can spot.

Hiring a real estate attorney to review the lease can help you avoid costly mistakes. A corporate real estate advisor can also provide valuable insights, negotiating better terms and ensuring the lease aligns with your business's goals.

Signing a commercial lease is a significant commitment that can affect the future success of your business. By taking the time to understand the key terms, identifying potential risks, and negotiating favorable conditions, you can protect your interests and set your business up for success. From understanding lease types and rent structures to reviewing maintenance responsibilities and exit strategies, the more informed you are, the better equipped you'll be to make sound decisions. Don't rush the process-ensure that the space you choose aligns with your business's long-term goals and provides the right environment for growth. 

At Spire Property Solutions, we understand that signing a commercial lease is a significant decision for your business. With over 25 years of experience in the commercial real estate market, our team of experts is dedicated to guiding tenants through the complexities of lease negotiations and renewals. Whether you're looking to secure the best terms, ensure fair market rates, or navigate the fine print, we provide tailored tenant representation services that protect your interests. Let us help you find the perfect space while ensuring your lease works for you, not against you

Author: Spire Property Solutions