Commercial Property Rental an Agreement of Space
Reviewed By: Pete Evering
The lease for a commercial property rental is more than just an agreement of space for money. The document is a binding legal contract that will outline every facet of use for the property, as well as which party will care for which financial responsibilities. Negotiating a commercial lease can be a complicated process, and it is advisable to consult an attorney well-versed in negotiating these, to ensure the terms and conditions suit your needs with no hidden surprises. Most terms in a commercial property lease can be negotiated, with the exception of restrictions placed by local law/ordinance, and the landlord’s contracts with previous renters/their insurance companies.
Utopia®’s asset management team develops and implements customized asset management strategies for third party portfolios that focus on value creation through proactive management, aggressive leasing and efficient operations. With a depth of marketing and management expertise at our disposal, we are able to deliver superior service for different property types from single to multi-family and industrial to office and retail.
Know your area.
A landlord’s flexibility to negotiate will be heavily influenced on the current market. If you are looking for a unique real estate property, or if there are not many options available, it may be difficult to negotiate the rental rate and you may have better luck negotiating perks instead. You’ll have the most power negotiating rental rates along with perks in markets with a lot of commercial space available.
Make sure the space listed is current and accurate.
Commercial properties are often renovated by tenants to suit their individual needs, and you’ll want to make sure the lease covers the property in its current condition. Especially when you’re paying by the square foot, measuring the space yourself will ensure you’re getting what you pay for, and not paying for space you can’t use.
Take and bring your notes.
There’s a good chance that at the beginning of your search for the ideal property, you made lists of must-haves, really-wants, and would-be-nices. Having this information readily available during the negotiation process will help you remember the bargaining chips available. You may be able to trade something nice for something you really want, such as unneeded overflow parking in exchange for free WIFI, which can save you money in the long run. Also having a list with any undesirable features or areas that will need improvement will provide you with counterpoints during negotiations. The use and maintenance of shared parking, restrooms, storage areas, elevators/stairs/halls, conference rooms, sidewalks and driveways are all perks you may have room to negotiate with depending on what is available to the property.
Other property expenses
The four main additional property expenses are utilities, property tax, maintenance/repairs, and insurance. Commercial leases are generally broken down into four categories, based on which of these expenses the tenant is responsible for:
Single Net/Net – Tenant pays utilities and property tax.
Net Net/Double – Tenant pays utilities, property tax, and insurance.
Triple Net – Tenant pays all expenses except structural repairs.
Full-Service Gross/Modified Net – Tenant and landlord split all expenses.
These definitions are considered standard but are still broad; additional clauses can be added if either tenant or landlord will need to cover additional costs.
As a general rule of thumb: any costs not accounted for in the lease are your responsibility. Check the condition of major appliances and systems so you can estimate their costs during your use. Depending on the circumstances, you may want to consider negotiating a higher rental in exchange for the landlord taking responsibility for everything else. You may also be able to negotiate a cap on your out-of-pocket expenses.
Determine renovations and work needed on the space in order to negotiate the renovation period itself — generally you will either pay for the renovations (and not for the rental of the property during construction), or the landlord will handle renovations while you pay rental fees. Include time needed to obtain permits if necessary.
Consider the future of your business as well as the area you’re renting in before deciding on how long you would like to rent. If you are starting a business and may need a larger or different office in the future, a short lease with options to renew may be favorable but may also come with a higher rental cost than a longer initial lease. If the location or space is important to the success of your business, additional fees or concessions made to secure your ability to continue renting after your initial lease may be worth it. You may also be able to negotiate lower early termination fees or have a sublease clause added so that you still have options if your business closes or relocates.
Finding a good fit for your business can be a challenge. After spending time searching, visiting, discussing, and finally deciding on the right property, negotiating the lease can feel like a daunting task and it may seem easier to just sign and be done, but doing so could end up costing a lot in the long run. It is crucial to understand what the lease entails, and this knowledge can assist you in negotiating terms that are more favorable for you and benefit your business.
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