Tips for Renegotiating Your 2017 Commercial Lease
As we come to the end of another year, many business owners are anticipating the renegotiation of their commercial leases. Maybe you signed a short-term lease so you could get your start-up off the ground. Or, perhaps you’re coming to the end of a multi-year lease on your current space. The terms of your lease can help your business grow or hold you back, so it’s important to get professional legal advice before signing any commercial lease.
Know the Type of Commercial Lease You’re Negotiating
The most common type of commercial lease is a full-service gross lease or modified gross lease. In this arrangement, you pay your landlord a base rent that covers structural repairs, taxes, insurance, maintenance, utilities, and other operating expenses.
While a gross lease makes paying for expenses simple—one payment covers most or all of your lease expenses—it can also cost you money. Your base rent payment does not increase or decrease as building costs fluctuate. You’ll also want to understand what your base rent payment covers. When an unexpected cost arises, the first thing your landlord will do is take a look at your lease. If the cost is not stipulated, your landlord may pass it onto you.
In addition to gross leases, you may sign a triple net lease, where you pay separately for your share of all building operating costs aside from structural repairs. A double net, or net-net, lease requires you to pay separately for utilities, taxes, and insurance, while your landlord covers maintenance and repairs. A single net lease requires you to pay utilities and property tax separately, with your landlord paying maintenance, repairs, and insurance.
Look Out for Inaccurate Numbers on Your Commercial Lease
Landlords often use the same lease agreement for multiple tenants. This means the square footage included in your lease—especially for common spaces such as hallways and the lobby—could be inaccurate. Don’t pay for square footage you won’t have access to. Be sure to measure your space and update the numbers on your lease.
Speaking of common areas, be sure that you’re getting your money’s worth out of the lobby, hallway, and elevator. Your landlord will likely charge you what’s called a multiplying factor for your fair share of these common spaces. But if you don’t have the foot traffic to get full benefit of these areas, you can negotiate a lower multiplying factor.
Do the Math on Extras and Automatic Rent Increases
Be absolutely sure that you understand exactly what’s covered by your monthly rent and what will be extra. If you must pay for utilities, cleaning, and security separately, add these costs into your total monthly budget so you don’t get sticker shock later.
Finally, many landlords include an escalation clause in commercial leases. These clauses stipulate an automatic increase to your base rent on a gross lease. These clauses are legal, valid, and common, but you can negotiate the rate of the escalation and even ask for a cap.
Commercial leases are much more complicated than residential leases. Because the terms of your lease can help your business grow or hinder your success, it’s important to seek the advice of a real estate attorney. Contact Jon Morphew and the Morphew Law Office, PLLC at 612-790-9189 today for a free consultation.