Negotiating Commercial Leases to Your Advantage

When you're in business for yourself, every expense is important, and the cost of your business's space could be the difference between profit and loss. That's why you and your lawyer will want to be extra careful in negotiating the terms of the lease for your space.

The saying "Don't sweat the small stuff" does not apply to commercial leases. Leases are binding legal contracts. What you agree to today will affect you and your business where it counts most - the bottom line - for years. You're well advised to ask your lawyer to handle the negotiations, or at the very least to carefully review the lease before you sign it.

Here are some tips to keep in mind as you look for red flags in the lease.

First, read all the lease. Even the small print. Especially the small print. Now is the time to be picky. Be clear on exactly what is included in the lease. Is parking included? Who is responsible for keeping the sidewalk and parking lot cleared of ice and snow? If the phones go down, who is responsible for getting them fixed? Who pays for the cleaning crew? Elevator repairs? Security? Minor repairs? Bathroom supplies? Garbage removal? Double check the obvious: square footage, the name of the company, the length of the lease.

Most landlords will provide you with their standard lease form. This is probably a "one size fits all" type of lease which may be inappropriate for your business. Just because landlords call it "standard" does not mean that you can't negotiate the terms.

How much leverage you'll have in the negotiations depends on the market for the real estate you're considering, but these are the terms by which you and the landlord will abide, so if something in the lease worries you, flag it.

Second, if it isn't in the lease, it doesn't exist. Forget what the landlord promises you as you're negotiating the lease. If it isn't in writing, it isn't yours. For example, the building is patrolled by security guards hired by the landlord. If your lease does not include language that the landlord will provide security for the customers and tenants, the landlord has the right to stop providing security and there is nothing you can do about it. On the other hand, if your lease states that the landlord will provide a certain number of security guards to patrol the building during business hours, the landlord must do so.

The Basics

A basic lease will require you, the tenant, to pay the landlord a sum of money for the privilege of operating your business in the landlord's building. This will generally be referred to as base rent. Base rent is calculated by taking the square footage of the space and multiplying it by a set dollar amount (i.e., 5000 square feet x $2.25 per square foot = base rent for the year). The square footage used in the lease is not the same as the "usable" square footage, as the usable footage is always less than what you pay rent on. The rent per foot, and the way the square footage is figured, may or may not be negotiable.

Additional Rent

Here comes the tricky part. The base rent is only part of what you have to pay. Be aware that there will be another clause to cover additional rent or excess use. This section is negotiable. You should pay extra attention to every word. This catchall can be a blank check for the landlord's benefit if you're not careful.

Have the landlord define, in great detail, "additional rent". Find out whether the base rent includes taxes, insurance on the building and utilities, or whether this is part of the additional rent. This is where the landlord will charge you for such items as after-hour heating, ventilation and air conditioning (HVAC) or improvements made to the building that may not even benefit you. These items can quickly add up to several hundreds of dollars per month. Find out if the cost is shared among all the tenants in the building. Try to negotiate the right to challenge the landlord's calculation of additional rent and operating expenses and try to add a provision requiring the landlord to submit details of its charges.

Operating Expenses

Another clause that can cost you a bundle is operating expenses. A standard landlord lease will require you to pay for all costs of owning, managing, maintaining and operating the complex. This will usually include the key phrase "without limitation".

At the very least, you will want to exclude from operating costs:

• capital costs for the building
• the costs of any debt financing
• construction costs for improvements to the space of other tenants
• costs covered by the landlord's insurance
• costs covered by warranties under the landlord's construction equipment contracts.

Sophisticated tenants won't stop there, however. You will also want to exclude:

• costs of disputes between the landlord and other tenants
• costs connected to concessions operated by the landlord
• costs of obtaining and installing art or decor for the complex.

Find out how the common area charges are calculated. If the cost is shared, find out whether it is calculated on a pro rata basis. In most shopping complexes, large retailers, often called "anchors", are given cost reductions to encourage them to lease space in the center. One concession is that the large retailer will pay a flat rate, rather than a pro rata share, toward common area costs or operating expenses. The landlord deducts this amount from the overall operating expenses and then divides up the remaining operating costs on a pro rata basis among the small tenants.

If your business is the smallest in the mall, you don't want to be required to pay as much or more toward operating expenses as the behemoth department store. Bargain for language that protects you from paying more due to disproportionately low contributions from the larger retailer. As with additional rent, your share of operating expenses should be based on the percentage your square footage is of the total square footage of the building. If your square footage is 5% of the building, then you should pay no more than 5%.