Leasing Commercial Space

Eventually, your startup may come to need commercial space, whether it be office, retail, manufacturing, etc. There are a number of issues to consider when leasing out commercial space.

1. It’s not like renting an apartment — Commercial leases differ from residential leases in many important ways, because unlike a residential lease between a landlord and individual tenant where the landlord is presumed to have the superior bargaining position, commercial leases are typically business-to-business transactions. As a result, there are typically fewer protections with commercial property than compared to residential property. For example, residential leases have an implied “warranty of habitability”, where the landlord warrants that the premises will be habitable (have running utilities, no mold, no structural defects, etc.). Although a few states have an analogous concept known as the warranty of suitability, most states (including Massachusetts) do not. So you must be careful to ensure that you negotiate sufficient protections into your commercial lease.

2. Landlords prefer longer leases — Whereas residential leases are usually only one to two years in length, commercial landlords prefer to have longer leases; five or ten year commercial leases are not unheard of, though if you think you may outgrow your space in a couple of years, you can get a shorter-duration lease, or include an option that lets you terminate if you outgrow the space

3. (Mostly) Everything’s negotiable — Also, whereas residential leases are usually standard forms, commercial leases are usually individually negotiated and drafted on a tenant-by-tenant basis. Everything, or at least mostly everything, in a commercial lease is negotiable; the longer the lease, the more the landlord will be willing to negotiate, since you are making a bigger commitment. When you sign a longer-term lease, you can usually negotiate more stable rent (if you have shorter leases, it will give your landlord more opportunities to increase rent), have the landlord cover more maintenance and upkeep costs, and even make significant changes or updates to the space (such as changing the floor plan or installing utility outlets). 

4. Read the whole thing — Because everything in a commercial lease is negotiable, you will want to read the whole lease to make sure that you aren’t committing your business to expenses it can’t handle. Things you will want to check for may include:

– How is rent paid (monthly, quarterly, annually, etc)

– What does rent cover? Your rent may just cover lease of the space, or it may also include things like insurance, property taxes, maintenance, utilities. If rent doesn’t cover those things, you may end up spending more than you had budgeted for.

– What happens if you default on rent, or your company goes out of business?

– What happens if you outgrow the space, or conversely, you have to downsize and the space becomes too big? Do you have an option to cancel, or to sublet?

– If you are leasing retail space in a multi-unit property such as a strip mall, what are your rights if other tenants move out? You may not want to be stuck in an empty mall.

5. Think about retaining a commercial real estate attorney — If you’re unfamiliar with commercial leases, you may want to retain a commercial real estate attorney who can explain the meaning of lease terms and negotiate with the landlord on your behalf.

 

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