Negotiating Your Perfect Office Lease (Without Getting Played)
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Going into business as a first-time entrepreneur is an exciting venture, but it comes with many challenges. One of the most crucial steps is securing the right location and negotiating a fair commercial lease for your office space.
While most commercial real estate (CRE) landlords are honest and professional, a few try to take advantage of inexperienced tenants.
For example, a lease may have confusing clauses that aren't honestly explained. Other landlords may not arrange repairs to your space or the entire building, possibly disrupting your ability to run your business.
Here, we'll help you recognize and avoid potential pitfalls when negotiating a commercial real estate lease. You'll learn about common ploys dishonest landlords use, how to manage them, and more.
You may be able to spot potential problems when you're checking out a potential space, simply by chatting with existing tenants or looking for existing problems, such as an elevator or bathroom being out of order for a long time.
Landlords who try to pressure you into finalizing a lease after a first walk-through may have something to hide.
Before we look at some common ploys used by unscrupulous or lazy landlords, there's a basic rule to remember: Knowledge is power.
Get Smart, So You Won't Be Outsmarted
When you thoroughly understand how a commercial lease works and know what clauses may be included, you'll be well on your way to signing a lease that delivers exactly what you've agreed to.
With this in mind, here's what you'll probably see when presented with a draft of a commercial lease.
Commercial Lease Clauses
Your lease will probably begin with a section that defines the tenant and landlord as the parties and the space being leased as premises.
While different landlords and/or property owners use their own chosen templates, a standard commercial lease may contain most or all of these clauses:
- Use Clause: This defines how you will use your space.
- Term Clause: The length of your lease, together with starting and ending dates. Ensure the start date works for you; otherwise, you'll pay rent for an office you're not occupying.
- Rent: Study this carefully to see whether this matches your rent estimate. You'll also want to see if other costs, such as maintenance, utilities, and/or property taxes, are included.
- Security Deposit/Letter of Credit: This assures your landlord that rent will always be paid. A Personal Guarantee may substitute for these or be in addition to them.
We'll explore the basics of commercial leases here. We recommend you take a few minutes to read it, or bookmark it for later.
Here are tips, strategies for small business leases, and some situations to watch out for.
Be Aware of These Sneaky Tactics
We'll start with a common tactic that you may encounter during your first meeting with a landlord that seems legitimate.
#1 – Beware of Verbal Promises
Like other leases and sales contracts, your mantra should always be to get it in writing.
A landlord may promise to renovate your space before move-in, discount your first year's rent rates, or offer similar incentives. But you can't enforce these if they're not in your lease.
#2 – Refuse Overly Restrictive Clauses
Look out for lease clauses that unreasonably limit your business operations or give the landlord unreasonable control over your space.
Clauses restricting your hours of operation, signage, or ability to sublet or assign the lease could be expensive while hampering your business growth.
While these are most commonly seen in retail leases, it's still something to watch out for, no matter what type of business you own.
#3 – Watch for Hidden Costs
Carefully review your lease for unexpected charges, as a landlord may try to sneak these in by using vague language.
These can be for maintenance, property taxes, or just about anything else. Make sure everything is described precisely in every line of your lease.
#4 – Understand Who Does Maintenance
Some landlords try to shift repair and maintenance responsibilities to their tenants. This is something you won't have the time or money to do.
Ensure that your lease clearly outlines who is responsible for various types of repairs and maintenance, including structural issues and electrical problems.
#5 – Beware of Personal Guarantees
A personal ??guarantee means that you agree to be personally responsible for the rent payments. This may put you and your belongings, including any real estate you own, at risk in a worst-case scenario if you're not able to pay rent.
While personal guarantees are common in commercial leases, be cautious of landlords who insist on unlimited personal guarantees, especially for long-term leases. Instead, negotiate a limit on the guarantee's duration or amount.
#6 – Be Sure You Have a Fair Termination Clause
Ensure that the lease includes reasonable termination clauses for both parties. Be wary of leases that give the landlord broad rights to terminate while limiting your options.
If you're still concerned about ending up with a problem lease, you don't have to go it alone.
Assistance With Lease Negotiations
Suppose you don't have the time to study leases in detail or are nervous about your negotiation skills. In that case, you may want to consider hiring a real estate attorney or tenant representative.
Their skills and experience can help ensure you have a fair, affordable lease so you can concentrate on business.
Remember that a good landlord-tenant relationship is built on mutual respect and fair terms. Don't be afraid to negotiate, ask questions, and insist on clearly explaining any clauses you don't understand.
Being assertive from the get-go now can save you from headaches and financial strain in the years ahead.
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