The Importance of Having a Flexible Commercial Lease
When you are buying a business, one of the most important considerations is your location. Not only is your location key for obtaining exposure and developing your brand in the marketplace, it is also important from the standpoint of the commercial lease you will be signing.
What you pay in monthly rent and related expenses in your commercial lease will most likely be the largest ongoing expense you have. And for this reason, the terms and conditions of a commercial lease agreement can make a significant difference in whether or not the business succeeds.
When entering into a commercial lease, many business owners face a dilemma. They want to get the best price, but in order to do that, they are asked to make a long-term commitment. Oftentimes, to get an affordable rate, an owner needs to make a three to five-year commitment, for example.
Fortunately, there are ways to make a commercial lease agreement more flexible without sacrificing the savings you can realize by signing for a longer term. Here are four of them:
Early Termination Clauses: Careful consideration should be given to the options you will have to break a lease when you commit to a longer term. You hope you will be able to stay there for the full term, but you never know what can happen with a business. Rather than being responsible for the entirety of the lease if you have to leave early, you should have a predetermined early termination penalty that is reasonable for both sides. In general, a reasonable penalty might be a couple months’ worth of rent.
Expansion and Contraction Clauses: Maybe you will be able to stay for the full term of your lease, but sometime down the road, you will find out that you need more space, or that you can get by on far less space. Expansion and contraction options give you the ability to acquire more square footage or cut back on square footage at certain points during your lease. You may also want to ask for a right of first refusal in the event that adjoining space becomes available at some point in the future.
Right to Renegotiate Clauses: Sometime into the term of your lease, you might find out that your rent or other terms and conditions are not working for you. Maybe you want to stay in the building, but you want to do so under more favorable terms. A renegotiation clause gives you the right to revisit certain aspects of the commercial lease agreement at a predetermined time in the future, often at the halfway point of the lease.
Right to Assign or Sublet Your Space: The right of assignment or subletting could be useful if you want to cut back on some of your space and lease it to another party, or if you need to relocate before your lease term expires. Oftentimes, a landlord will be willing to allow assignment or subletting as long as they are able to approve the new tenant, and as long as you remain ultimately responsible for paying rent and covering any damages that the new tenant may cause.
Work with an Experienced Business Intermediary: When you are purchasing a new business, the commercial lease is one of the most important contracts you will sign. This, among other details, can be done much more smoothly by working with a professional business intermediary. Also known as business brokers, business intermediaries work closely with buyers to help ensure that they are able to get into the right business, and that they have the most favorable conditions in place to be successful.