Most people have experience in negotiating residential leases. However, when negotiating a commercial lease, it is important to be aware that are significant differences.
On a basic level, commercial leases can vary more widely than residential because the needs of each tenant are significantly different. As such, all aspects of a lease are up for negotiation with the landlord, down to some of the most minute details. Some of the key terms and conditions typically included in commercial leases are lease duration, renewal options, rent payable and rent increases, permitted use, responsibility for repairs and maintenance, rent defaults and breaches, redevelopment clauses, and exclusivity of trade.
Many of these terms and clauses need to be considered carefully for the tenant to get the best deal on their lease, and there are some aspects of a lease of which a tenant needs to be wary. If you’re looking to lease a commercial property, here are some crucial items that you need to know:
Lease Duration and Renewal
The duration of a commercial lease and the option to renew it may seem like a simple matter but it can be critical to the success or failure of your business.
Business goodwill is often attached to a business location. Landlords are under no obligation to renew a lease once it expires, which could place that goodwill under threat. If tenants can negotiate a longer lease term it will protect their investment for a greater duration and grant them more time to find alternative premises.
A longer lease term will also ensure that you can recoup any investment in the property, including structural alterations. Thus, it is critical to calculate your business’s projected growth over a five-year period in order to determine the lease period.
An option to renew clause can make it more likely that the landlord will be willing to negotiate a new rental period, albeit at a higher price.
Changes to the Property
In commercial leases, the tenant may be allowed to make some minor alterations to the property. This will ensure that the tenant’s business can run more smoothly. In the manufacturing sector, major alterations to the property may be required due to technological changes.
Tenants should ensure that the ability to make alterations to the property is explicitly detailed within the commercial lease. Otherwise, your ability to expand and shift business direction may be restricted by clauses with the agreement.
The Make Good Clause
Notwithstanding the above, some commercial property leases may contain a Make Good clause. This requires tenants to return the property to its original state. This clause appears when tenants want to make changes to the existing fit-out, and the clause allows the owner to rent the building to another suitable tenant when it is vacated without having to finance major restorations.
Even without this clause, landlords could take legal action against a tenant if the property was not returned to its original state. To forestall a future legal quagmire, it is critical that the tenant ensures that a suitable, well-constructed clause is inserted into the lease agreement, ahead of time.
Parenthetically, tenants should ensure that they have the money required to finance any restoration.
Permitted Use
Some tenancies require special council approval to operate, especially if manufacturing or the use of heavy chemicals is involved. Even childcare centres or medical centres require council approval. A permitted use clause in the lease agreement – inserted by the landlord – will safeguard your business investment.
Redevelopment
Some landlords may include a redevelopment clause within the lease agreement, granting them the right to terminate a lease before its end in order to carry out major renovations. Even more so than a residential lease, being evicted from your property can have serious consequences to your long-term plans, severely impacting your business.
Tenants should attempt to have this clause removed from the lease if possible, to stop the possibility of an early eviction. If that is unrealistic, negotiate with the landlord to provide compensation for loss of trade from relocating the business, as well an appropriate reduction in rent. The redevelopment clause should provide enough compensation to leave the tenant in the same position as if the redevelopment did not occur.
A good commercial real estate agent will be able to guide you through these tricky considerations to ensure that you get the best lease possible. With it comes the peace of mind that you will be able to operate your business with security well into the future. MCO has been assisting business do just that for decades, so contact us today and we’ll help you get a great deal on the perfect location for your company.