The commercial lease is a complex legal contract, often the launching point of your business as it moves from the bank and into physical reality. While there are all means of details in the document, rent is always the overarching and dominant point.
Settling on a per square foot price may not be much of a negotiation, but the other clauses that affect what you pay will have lasting effect on your business as a whole. There are variables including operating costs, building improvement costs, unexpected maintenance or rent issues, and how to handle rent increases over time. Make sure your rent clauses are working for you.
The escalation clause
When and how rent increases is vital to your business. Escalation clauses are common in commercial leases, basing increases on timing, business growth and operational costs of the facility. Make sure you manage this element of the lease carefully as the wrong agreement will leave you putting too much income toward rent instead of improving and growing your business.
In your lease, you’ll want to define operational costs as strictly as possible. Define costs directly related to your business as compared to items covered by the property owner’s insurance or for other tenants that share space.
The more specifically you define a cost and category, the less likely you are to dispute it later on. You’ll want clear definition of cost coverage: when it’s the landlord’s responsibility and when it falls on you. Calculate expenses in advance so you are not hit with a surprising bill later, as small percentages add up quickly. Even an increase of a partial percentage can add up over time.
From natural disasters to freak accidents, working out a commercial lease requires a bit of Socratic wisdom concerning unexpected circumstances. If your business is successful, it’s going to be tested by anything and everything. Can your rent be reduced if a state of emergency is declared and your business park is evacuated for several days? What if a neighboring business is the focus of a protest or boycott that keeps people from visiting you?
Everything that happens has far reaching consequences that, however small, could affect your business and your bottom line. While it’s impossible to predict the unexpected, there are protective measures for all manner of scenarios. Think about the different segments that drive and influence your business and what could disrupt patterns.
There’s a reason that commercial leases don’t use templates like much of the residential world. Your business is unique and has more layers than simply being a tenant. You’ve carefully worked out a business plan and sought investors and financing. When negotiating rent clauses, leave no stone unturned.
Your lease directly impacts the success of your business, so working with a commercial real estate attorney to handle negotiation and the finer points will help ensure something you can be certain is working to your benefit and you keep you focused on running your business instead of worrying about the building.