Outsmart Your Landlord

In the world of commercial real estate, until you sign the lease, almost everything is negotiable. In addition to price and perks, business owners can negotiate for greater legal protections. When hunting for your next business location, refer to the eight tips below, which can save you headaches — not to mention money — down the line.

1. Maximizing Costs

When renting office space, you should remember that the premises you are renting may be measured using different methods, which may favor the landlord. Your rent will likely be based on “rentable space,” which includes your premises as well as a portion of building common spaces, such as public hallways or utility closets. “Usable space” is the actual footprint of the premises, but not all usable space is useful. Much of the floor space of the premises may be oddly configured, and when it is built out, interior walls and dividers will destroy useful space. Your attorney can negotiate the standards used for measuring the premises and in determining the tenant’s percentage share of costs. An architect should measure the space in accordance with these standards and see if the landlord’s measurements are accurate. If you’ve already negotiated a price per square foot, a smaller measurement will save you money immediately. An architect can also do a feasibility study, which will reveal how much useful space there is, and whether the space can be used efficiently for your particular purpose.

2. Rent Concessions

Rent concessions include an early occupancy period and landlord contributions to the cost of preparing the premises for your use. While the landlord will require a security deposit and disclaims obligations to perform services during that period, you will get the chance to begin work preparing the space before adding rent to your overhead. You can offset your initial build-out cost by asking to begin the term of the lease on the 30th day after the occupancy date, creating a “free rent” period in which to prepare the premises. During a free-rent period, you may still need to pay the landlord’s “actual costs,” known as “additional rent,” including electric charges and your share of real estate taxes. When the real estate market is weaker, you may be able to negotiate a longer “free rent” period, in which your rent will be reduced in the initial years of the lease and increased in the latter years, giving you time to grow your business with less overhead. You also can negotiate tenant allowances, in which the landlord agrees to pay a certain amount of the build-out cost. You can negotiate further tenant allowances if you later decide to expand into neighboring space, as outlined below.

3. Expansion Possibilities

Your business may expand in the future, and when that occurs there is no need to replicate your start-up costs. In an office building or retail space, it is especially helpful to negotiate a right of first option to expand into adjacent premises. This means that if the neighboring premises become available, you get the option to lease them first. Often landlords will allow you to exercise the option on the same terms as your current lease, if it arises in the first year of your lease. Keep in mind that if the option is not exercised (within the predetermined time period) it is lost forever.

4. Negotiating Out of a Losing Lease

While no one likes to imagine a scenario where your business does not do well enough to maintain your lease, it is important to negotiate an explicit right to sublet the premises or assign your lease to another; otherwise you could be stuck with the lease, even if you no longer need the space. If the landlord does not want to give you an unfettered ability to sublet or assign, an attorney can help negotiate terms and conditions upon which the landlord will grant its consent.

5. Lease Into Ownership of Property

There is always the possibility that your landlord will sell the property in which your business is located. Although this may be more applicable to a lessee in a small or single-tenant building, any savvy lessee should note that a “right of first refusal” for ownership, carefully negotiated, can create additional value in your lease if the landlord decides to sell. This will allow you to negotiate purchasing the building yourself, on the same terms the landlord has already negotiated with another prospective buyer. For a successful business in an ideal location, this is a great option to turn your lease into a real estate interest.

6. Lease Protections

Because the landlord may sell the property or default on its mortgage, it is important to negotiate a non-disturbance agreement with the landlord and its current or future lenders. This means your landlord obtains a non-disturbance agreement from its lenders as a prerequisite to signing the lease, and is required to obtain a non-disturbance agreement with its future lenders. Although this can be a complex document, an attorney can help you navigate through it. A non-disturbance agreement will protect your lease from termination in the event the lender forecloses on the property. You can also negotiate a requirement that your lease be recognized by any future landlord. These provisions will help ensure the continuity of your business. These protections are “must haves” for any commercial lease.

7. Protections in Case of Catastrophe