Important Considerations in Negotiating a Commercial Lease Agreement

By HunterMaclean Attorneys, special to Business in Savannah

A commercial lease agreement is one of the first and most important contracts that a brick-and-mortar business owner will enter into, as it can have repercussions throughout the life of the business. The lease agreement quite literally lays the groundwork for the financial plan of a location, and the terms deserve scrutiny. Business owners are often provided a lease by their potential landlord that is weighted heavily in the landlord’s favor and must be negotiated to find an equitable balance that will allow the business to flourish and grow.

Although every lease will be customized to a business and location, here are some important overall aspects to consider:

Term and Rent. Term and rent are the starting place for negotiations and can have the greatest impact. If a tenant wants to test out the location before making a longer commitment, a starting term of one or two years with a renewal option at the end might be ideal. The renewal option can structure future terms and gradual rent increases to avoid a dramatic spike in costs if the tenant decides to stay in the location.

Premises. The lease should be clear as to whether the heat, air conditioning, and other utilities are included in the rent. The lease should also clearly identify the hours when the landlord will be available in the case of an emergency. Depending on the age and condition of the premises, it may be prudent to have the wiring and plumbing independently evaluated to make sure the facilities are adequate.

Improvements. The lease should detail any physical modifications to be made for the business, along with costs to be assumed by each party. It is important to make sure that the proposed pre-rental work is comprehensive, as modifications made after the tenant is in place can be expensive and disruptive to the business.

Ongoing Expenses. A thorough lease agreement will enumerate all expenses included with the rent. Landlords may include fees for property management as well as maintenance of hallways, parking lots, public restrooms (if any), and other common areas. The lease should specify if property taxes and other costs such as tax escalations are included in the monthly rent.

Insurance. Businesses are required to have premises insurance before signing a lease, receiving approval for a loan, or conducting many other transactions. A tenant should be informed about what types of insurance are required and in what amounts, and whether or not premises insurance is included in the monthly rent. If insurance is included, the lease should be specific about coverage and deductibles.

Repairs. The lease should be specific as to who is responsible for repairs to the premises. The tenant should negotiate for the landlord to assume repair responsibility for all structural elements of the premises, for the common areas, and for the building systems, and for repair of all leaks or decay in the building. It is a good idea for the tenant to request the right to withhold rent if the space is unusable or if the premises are inaccessible for a period of time because of damage or other habitability concerns.

Assignment and Sublet. The lease should specify that the landlord will be “reasonable” as to both assignment and sublease. It is prudent to negotiate for the right to sublease a percentage of the space without the landlord’s consent, so that if necessary the tenant can sublet some space to help meet rent payments.

While a business owner may only enter into a handful of commercial leases over time, the professionals on his or her team—attorney and broker—will have negotiated hundreds These individuals can bring valuable perspective on the market as well as vital insight into what a tenant can reasonably expect to achieve in negotiations.  Making use of a qualified team’s expertise will help reduce the likelihood of unbudgeted expenses and can go a long way to ensuring a good relationship between landlord and tenant. A thoroughly negotiated commercial lease agreement that is well aligned with the business plan and structured for healthy growth will provide a strong foundation for a new or expanding business.