When entering a commercial lease, you need to understand how different provisions can impact your business operations. A well-negotiated lease can provide stability and predictability, while a poorly considered lease can lead to unforeseen challenges and financial strain. This section aims to introduce you to some of the key elements of commercial leases, helping you make informed decisions that align with the needs and goals of your business. From understanding the types of leases available to evaluating space, term, improvements and operating costs, this information will help you prepare for the complexities of commercial leasing. By carefully considering each aspect, you can secure a lease that supports your business's long-term success.
Types of leases:
be sure to understand the types of lease agreements available. There are many,
including gross rent lease (GRL), modified GRL, net lease (NL), double NL,
triple NL and percentage rent lease. Determine which is best for you.
Space: understand the difference between
usable and rentable
square feet.
- Usable square feet is the space contained within your demised premises that you can use.
- Rentable square feet includes a proportionate share of the common areas of the building and on which rent will usually be charged.
Term: for the sole or small firm practitioner even five years
may be a long time. Consider if a short-term lease (possibly
with renewal terms) is preferable to a longer-term lease.
Improvements: you can ask
for anything you want but remember there is always a cost attached. Consider the
types of improvements and upgrades that can be made and who is responsible for
the costs. Don't get carried away.Assignment: determine whether you can assign your rights,
whether the landlord’s consent is required and, if so, if it can be
unreasonably withheld.
Personal guarantees: the landlord may ask for them but be cautious. Ensure you get legal
advice and consider negotiating the terms.
Moving allowance and free rent: you may be able to get
these perks now which may be helpful
but remember you may have to pay them back over the term of the lease.
Operating costs: most operating
costs are beyond the control
of the landlord such as property taxes, maintenance costs and
utility costs. Check the operating
costs history and negotiate a cap on any increase from year-to-year if you
can. Check out the reasonableness of the operating costs with a knowledgeable commercial realtor.
Insurance: make sure you understand your insurance obligations under the lease
and how much it will cost to meet them.
Option to renew: a renewal clause gives you the
right to continue leasing the premises, and often sets out a notice period, the
duration of the new lease term, and other details. Renewal clauses may also
specify the rental amount for the new lease term, which may be a good right to have in a rising
market as opposed to a static or declining market.
Option to expand: consider
if you need additional space adjacent to your premises with the option to
expand into it, or a right of first refusal on the space.
Arbitration clause: if you have a right to renew with the rent amount to be settled by
arbitration, be very careful with the arbitration clause, as the process
may involve costs and complexities that are often overlooked. It's crucial to
understand the potential implications and ensure that the clause is fair and
transparent. Consulting with a legal expert specialized in commercial leases
can help navigate these nuances.
Rent escalation clause: pay attention to any provision that says the rent can go up, but it can't go down.
Get help: don't be afraid to enlist the help of a knowledgeable commercial realtor to help with
locating and screening space. And if you don't have experience with commercial
leases, have a lawyer with commercial lease experience review the landlord's
form.
Ask questions: don't accept
something you don't
understand because you are
embarrassed to ask for clarification.Additional information in this material
provided by: Maury G. Van Vliet, Vanterra Management Ltd., Edmonton, Alberta