Negotiating Commercial Leases: Rental Rates, Renewals and Termination Clauses

Once you’ve identified your preferred business location(s), gain a good understanding of market lease rates in those areas. You can fast-track your research by talking to a realtor or leasing agent who specializes in commercial or retail spaces. They will have the latest information on lease rates, cost per square foot, vacancy rates, as well as available inventory,

Once you’ve chosen a few viable locations, consider how well your business will fit with the area and with existing tenants of the building. It can make a difference in how successful your business will be and that can have an impact on the amount you should be willing to pay for your lease.

  • Talk to area businesses. Is the neighborhood growing or in decline? If it’s in decline, lease rates may be more negotiable.
  • Does your business rely on foot traffic? What are other tenants observing about visitor traffic?
  • Maybe your business doesn’t generate foot traffic. You may be able to negotiate lower common area payments if other tenants use the common areas more.
  • Will you need parking spots for employees? For clients or customers? Will there be enough parking spaces for your business needs?

Commercial Lease Competitor Clause

Are there any competitor businesses in your building? If not, you can ask for a competitor clause in your lease. Your landlord would then need to get your consent before they could rent space in the building to a competitor.

Leasehold Improvement Clause

Businesses often need to renovate their space to suit their needs. Before you sign the lease, consider any improvements you may need. You may be able to add an improvement clause that requires your landlord to reimburse you for the cost of leaseholder improvements if your landlord breaks the lease or does not allow you to renew.

Commercial Lease Renewal Clause

A commercial lease could be month-to-month but more often it is 3-5-10 years. If you are unsure about your short-term needs (which might be the case if you have a very new business), you may want to ask for a shorter-term lease. While a short-term lease can cost more per square foot, you aren’t on the hook for years of payments should your business fail or move early.

Be sure there is a clause in your rental agreement that gives you the option to renew your lease at the end of your lease contract. You could even negotiate a series of lease renewal options, say, a two-year lease with the option of renewing for two more two-year terms.

Commercial Lease Termination Clause

Instead of a short-term lease, you might consider negotiating for the right to early termination of the lease agreement. In retail leases, this right to early termination is called a “kickout.” Identify the terms under which an early termination clause might be triggered, such as failing to meet a gross sales target. Another option is for the tenant to be allowed early termination on a set date (for example, 3 years into a 5-year lease).

Landlords usually ask the tenant to pay a fee to exercise an early termination option. Some leases require the tenant to pay all or a portion of the remaining rent. These are points of negotiation.

You may also be asked to reimburse the landlord for the cost of preparing the space the space you’ve vacated for the new tenants’ use before they move in. If the landlord wants these costs, it should be spelled out in the contract.

What else should be noted in the termination clause? The circumstances under with your lease could be terminated by the landlord. How you will be notified of problems. Can your landlord terminate your business lease in one location and offer to relocate you to another location?

You Don’t Have to Sign a Standard Commercial Lease Agreement

Commercial leases are complex and mistakes can be made. It’s critical to involve a commercial lawyer in your lease negotiations, or at the very least in a legal review of your lease.

The Fell Law Firm represents retail, commercial and industrial ventures in the Dallas-Richardson-Plano area. Mr. Fell can assist with rental contract negotiations or can provide legal review of a proposed rental contract. Call 972-450-1418 or complete our online contact form to schedule a consultation.

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