Deciding to lease office space for your business is a big step and one that can be nerve-wracking for many business owners. Much like negotiating a lease for your home, there are some things to keep in mind when negotiating an office lease. Read on to find out how to negotiate the best lease terms possible for your office space.
[Read: Need a New Office? Tips for Finding the Perfect Space]
How to prepare an offer letter
After you’ve found a space you would like to lease, it’s best practice to submit an offer letter — or a counteroffer letter — to express your interest in the property. This letter should demonstrate why you are an ideal tenant while allowing you to set some terms of your own.
Before submitting an offer letter, make sure it includes the following information:
- Contact and liability information.
- Occupancy date.
- Details of your business, such as your industry, time in business, business structure, etc.
- Any terms or counter offer you wish to include, such as any changes to the length of the lease or condition of the property.
[Read: 4 Business Owners on How They're Reopening Their Businesses Post-Coronavirus]
How to negotiate a commercial lease
Before you begin negotiating a lease, carefully consider and prepare for each of these items:
Lease terms
If you’re looking to get the best terms possible, consider asking for a longer lease. Landlords are more willing to negotiate and make concessions for tenants who are ready to commit to a 10-year lease as opposed to a five-year lease. However, if you’re concerned about being able to adapt as your business changes, try negotiating for a shorter lease with the option to renew. For example, instead of signing a full five-year lease, try negotiating for a three-year lease with a two-year renewal option instead. Be sure to structure the lease in a way that best suits your immediate and projected business needs.
Rent, rent escalations and counteroffers
While some landlords may throw in free rent for the first couple of months of a new lease, securing an agreement for fixed rent over the entire course of the lease is very rare. Landlords often insist on annual rent increases based upon percentage increases in the Consumer Price Index (CPI). If your landlord insists on rent increases, ask for the increases to be postponed for the first two years of the lease. If your landlord won’t agree to that, try to negotiate a fixed increase or a cap on the annual rent increase.
Regardless of whether or not you can come to an agreement about the annual rent increase, you can negotiate the other terms of the lease. Just like purchasing a home, landlords and listing agents in commercial real estate almost always expect potential renters or lessees to submit a counteroffer. Because they’re expecting a counteroffer, landlords often inflate the lease price or terms, so don’t be afraid to negotiate for the terms you want.
To give yourself the best chance of reaching favorable lease terms, consider hiring an experienced real estate attorney to review the lease and facilitate the negotiation process.
Tenant repairs, replacements, or improvements
Before you sign the lease, be sure to consider the property’s condition and whether you’re comfortable taking it as is or if you want the landlord to make improvements or repairs. If you’re planning on renovating the property yourself, be sure to submit a description of the proposed renovations to your landlord for inclusion in the lease. Including the renovation description in the lease can oftentimes lead to the landlord granting you an “allowance” or other incentives to complete the renovations.
Whether you’re planning on renovating your office space or if you want the most protection possible from incurring additional fees after your lease term, review the lease for any language that would hold you responsible for restoring the premises to its original condition by the end of the lease term. If the current lease terms include such language, try to negotiate the inclusion of a clause that states that the office space will be returned to the landlord at the end of the lease in the same condition as at the beginning of the lease, except for the following:
- Ordinary wear and tear.
- Unavoidable damage as a result of a fire or circumstances beyond your control.
- Alterations previously approved by the landlord.
Assignment and subletting
Throughout your company’s lifetime, you’ll face many changes, including ones that could require organization-wide restructuring. What you may not realize is that changes in company structure can affect the terms of your office lease, especially the assignment and subletting clause. Be sure to thoroughly review and negotiate flexible terms in the assignment and subletting clause as your lease may state that a change in 50% of the company’s stock ownership is considered an assignment that requires landlord approval.
[Read: When to Consider a Shared Office Space]
Legal review
While bringing in a broker to handle lease negotiations is common, keep in mind that brokers are not lawyers. Brokers are paid on commission, which increases with the overall value of the lease. To give yourself the best chance of reaching favorable lease terms, consider hiring an experienced real estate attorney to review the lease and facilitate the negotiation process. Real estate attorneys are paid regardless of the outcome of the lease term negotiations, so they’ll be able to objectively review the lease and help you secure the most favorable terms possible.
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