Commercial Lease Terms

Woodworkers discuss lease provisions that make a difference to someone renting shop space. October 13, 2008

Question
I'll be moving shop soon, and just wanted to tap into your experience with commercial lease agreements so I don't do anything too stupid. I'm a one man shop in VA and my previous landlord was very informal. What terms should I avoid, and what are reasonable terms to negotiate?

Forum Responses
(Business and Management Forum)
From contributor D:
Lots of things to keep an eye out for, but it all depends upon your market and your specific needs. What I've done is have a friend who had been a lawyer look over the lease provided, and point out things that stuck out that could be a problem (obviously, the lease is going to be heavily favored towards the landlord, and commercial leases in particular). I then sat down with the landlord and discussed specific issues (there was a limit on how many people could be in the shop, for example). I then wrote a rider that modified some of the stuff. But my experience is, talk about things that cause concern - some of it is negotiable and just thrown in by their lawyers.


From contributor J:
Make sure you know what you're signing before you sign. A "triple net lease" is common with commercial rental property. If you aren't familiar with this term, it means in addition to your rent, you'll pay the landlord's insurance on the building, the property taxes and any upkeep that's necessary. These aren't necessarily bad deals but you want to know the rules up front. It would be a good idea to have your accountant and attorney look over the lease.

From contributor T:
Make sure the lease is recorded properly as an encumbrance on the property. This usually requires notarizing the paperwork and filing it with (in Washington State) the county. In Washington the law will hold the original landlord to the terms of the lease, but unless it is recorded, will not hold subsequent owners (heirs, etc.) to the same terms. The argument is that subsequent purchasers would have no way of knowing about any deals made on the property unless it was recorded as an encumbrance on the title.

From contributor O:
Contributor T is right that it would be to your advantage as a tenant to record the lease, but you will find clauses in most leases that prohibit this. We lease out retail spaces and this is one item that’s nonnegotiable with tenants. It just puts too many restrictions on a property (from the landlord's perspective).

It is a good idea to have your attorney look over the lease, as many items are negotiable, and also for you to understand everything about the lease. Commercial leases usually have clauses that allow for rent increases caused by increasing property taxes and utilities. You want to look at that close and make sure you understand.

In general we’ve had good tenants over the years and bend over backwards to make it work for them. But like anything, it's good for both parties to have a clearly understood agreement.


From contributor B:
Three things to consider:
-Make sure escalator clauses are typical for the area and type of structure you'll be leasing. Check with other businesses or a local real estate broker about this.

-Make sure you have the exclusive option to extend or renew the lease after the lease has expired.

-Everything is negotiable. Maybe you'd be willing to lengthen the term of the lease for 1 year if the owner puts in new landscaping, or whatever... Use the terms of the lease as leverage to get what you want out of the deal. Think win-win.


From the original questioner:
Thanks much. Nice to be able to pick the brains of those who have been there and done it.
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