Commercial leases are lengthy documents that can be seriously daunting to peruse, but you must take the time to read all of the terms carefully before signing on the dotted line. While every part of the lease document is essential, the following terms of the standard commercial lease contract are areas where you need to pay particularly close attention:
- Length of the Lease
The length of your lease is significant for your business. A longer lease can often secure a lower monthly rent, as landlords prefer to have tenants locked into place to reduce the need to renegotiate or fill vacant spaces frequently; however, if you anticipate your business needs changing in the near future, a shorter lease may be preferable. You don’t want to end up having unused square footage or having to pay costly fees to break your lease if you need to relocate. Having a sublease term can be beneficial if you opt for a long-term lease because you will have the ability to rent out any unused portion of your space if your business changes before your lease expires.
- Rent and Security Deposit Terms
Of course, the area that discusses how much you’ll be expected to pay is an integral part of your loan. Don’t just look at what the monthly rental rate is. Take the time to find out if and when rent increases and the maximum amount of the increase. You should also look for information about any fees you may be assessed in addition to rent, what portion of operating costs are passed along to you as the tenant, and what allowances are made for improvements to the space.
Pay attention to the security deposit, too. In some cases, you can negotiate your way out of having to put any money down to secure your space if you provide a letter of credit from a financial institution.
- Premises Terms
One area of a commercial lease that business owners often mistakenly overlook is the terms of the premises. This is the area that clearly outlines what you’re renting. For example, if you’re only renting a portion of the building, make sure that the contract includes parking and use of shared areas like any standard storage rooms, lobbies, waiting rooms, and conference rooms.
- Use Terms
Use terms outline rules that can be deal-breakers for some companies. Check this area to find out if there are any restrictions on what types of business you can conduct. Other tenants in the building may have exclusive clauses in their contract that prevent competitors from being located in the building. These terms could make it impossible for you to expand into other lines of business in the future. In this section of the lease, you’ll also find information about what type of signage and advertising you’re allowed to use on the premises.
Remember that the first draft of your lease is likely to have the most favorable terms for the landlord, but you do not have to agree. Landlords expect negotiation to occur, so don’t be afraid to make a case for improving the terms to bring the contract into a better balance to benefit both of you.
If you have any questions on this article or need commercial space, contact us anytime, we’re happy to help. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
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