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Before signing a commercial lease, consider this

As a business owner, you understand that Orange County real estate is a competitive market. There are new construction projects happening around the clock, and the city always seems to be building.

While this may seem like it puts renters at a disadvantage, it also offers businesses lots of options for rental property. When you’re looking for a new location, it’s important to consider this specific aspect of a commercial lease:

Negotiating for “what if”

The most important aspect of a commercial lease is making sure you have an opt-out clause. This needs to be something you discuss with the landlord before you consider renting a space.

An early-out option protects your business in two ways: if you need to expand or if you need to reduce costs.

There are a few ways you can negotiate for an opt-out clause in your lease. Keep in mind that landlords value reliability. It may cost a little more up front to get an out written into your commercial lease.

Income-based clause

This protects you in case your business has struggled. It allows for you to exit a lease if your income hasn’t met a certain threshold. Usually, landlords will be willing to accommodate these clauses in one-year increments. Sometimes you can get them down to even six-month periods.

Leasing in terms

An arrangement that affords the landlord some of the stability they desire while giving you an option to get out from a lease after a few years. You can ask for the lease to have terms written in for various lengths of time. These renewal terms can be spaced evenly or staggered to match your company’s projected growth.

The landlord can request a renewal period also be written into the lease. This is the period by which you must renew your lease, or it terminates. In addition, they may ask to write in a rent hike into these renewals as well, to offset some of the risks of losing a tenant. It’s important to negotiate an agreement that works for both parties.

Tenant replacement

This option puts the onus on you to find a new business or individual to take over the rest of your lease. Obviously, this isn't ideal, but if a competitive space is unwilling to go any lower it can be a good way to keep the option.

In this scenario, you would recruit and find a tenant that is a suitable replacement for your own business. Until you can, you would be responsible for your normal lease payments. This keeps all the pressure off the landlord and puts the responsibility on your shoulders. Not ideal, but in competitive markets, it may be the only option.

Protecting your business

Negotiating a fair lease is a great way to protect yourself and your business. It’s important to account for uncertainties, and writing a way out of a lease is one way to do that. While it may raise the amount of rent you pay per month slightly, it will save you a lot of hassle in the long run.

If you have any questions about commercial leasing, a knowledgeable real estate attorney can provide some guidance.

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