Negotiating a commercial lease
A huge benefit of working with a tenant broker? Negotiating a commercial lease on your behalf. If you’ve found a good broker, she will go to bat for you, saving you money where she can and limiting your exposure to risk throughout the lease term.
On the other hand, you’re the one signing the lease. The best way to feel like you’re making an informed decision, other than working with a broker you trust, is to brush up on some lease terminology and how it impacts you.
1. The Difference Between Commencement Dates and Occupancy Date
Did you know the date your lease officially begins, the date you become responsible for rent payments and the day you move into the office can all differ?
The Lease Commencement Date is the date your lease officially begins and you assume your rights and responsibilities as a tenant. Your Rent Commencement date is when you have to start paying rent. And your Occupancy Date is when the landlord has to physically turn the space over to you.
If your Rent Commencement date kicks in before the landlord has completed your tenant improvements, for example, you’ll be paying rent for a space you can’t use yet. Similarly, delays in your office build-out can impact your Occupancy Date.
Your broker can push for stipulations that minimize these risks, like setting a limit for the amount of time you have to wait before the landlord delivers the space to you.
2. Base Year and What It Determines in a Commercial Lease
If you’re signing a Modified Gross Lease, you have to partially cover your building’s operating expenses (like utilities, maintenance fees and property taxes). The Base Year helps determine how much you pay in building expenses after the first calendar year of your lease. For a full explanation, read here.
3. “Good Guy” Guarantees
A landlord’s worst nightmare is a tenant who stops paying rent and doesn’t vacate the premises in a timely manner. The landlord not only loses money on unpaid rent, he can’t lease the space to another tenant either.
Hence, landlords will often push for a Good Guy Guarantee to protect themselves. A Good Guy Guarantee stipulates that if you stop paying rent and don’t vacate the premises, the landlord can take you, the leaseholder, to court personally. That means your personal resources on the line, not just your business.
4. Right of First Offer vs. Right of First Refusal
A tenant with the Right of First Offer (ROFO) gets to make a leasing offer on the property defined in the lease before anyone else does. That could be the exclusive office space they currently lease. Or it could be another space in the same building. The lease should clearly define the “rights” the tenant holds.
Similarly, the Right of First Refusal (ROFR) means the landlord must grant the tenant the opportunity to match any other incoming lease offers before making his decision.
The requirements to exercise your rights are of particular importance. Do have to make a deposit to exercise your rights? How large? How much time do you have to make a decision? All negotiable. For example, if the standard window is 30 days within receiving your notice, you might consider negotiating a bigger window to a make a more informed decision.
5. Office Subleases
You might wish to sublet office space to another tenant for any number of reasons:
- You need to move (for any reason) before your lease expires. Subletting the old office might be cheaper than breaking the lease.
- You intentionally rented a bigger space you could go grow into, but for now, some of it is unused.
- You need to downsize, creating a surplus of unused space.
- You’re going out of business and wish to defray some costs.
Whatever the reason, it’s a moot point if your lease prohibits subletting to another tenant. If your lease does allow you to sublet, your landlord might have some strict rules, like final approval over a sublease or a cap on how much space you can rent to another tenant.
Subletting comes with risks, too. Renting your space to another tenant doesn’t alleviate you from your responsibilities as the lease holder. Your sublessor’s problems become your problems. Especially since it’s your signature on the lease.
6. Get a Real Estate Attorney
Commercial leases can be dense and lengthy, filled with jargon and clauses you don’t fully understand. They represent huge financial stakes. You will not regret having a real estate attorney review yours before you sign it. You can’t put a price on entering a huge financial agreement with confidence and expertise in tow.
To find a good real estate attorney, ask your broker or fellow business owners who have leased office space before. They can make a recommendation.