25 Things To Negotiate In Your Commercial Lease: Part 1

I remember getting my first commercial lease for a company I co-founded in 2009. It was scary! The landlord sent the lease to us on legal size paper, and at the top of the page it said something like, “New York Form Commercial Lease.” This heading made it seem like the lease was a) non-negotiable and b) a standard form. This was funny, because commercial leases, like prenuptial agreements, are some of the most negotiable legal documents.

Today, many of my entrepreneur clients in New York obtain space for their businesses either by renting from a co-working space or by renting one or several rooms from another business. They are often leasing office space for the first time, and don’t know the unique terms a commercial lease can contain. 

When negotiating a commercial lease as a tenant, it’s important to understand the landlord’s position. The thing the landlord cares most about is the lease term. Their second priority is the per square foot price you’re paying, and the third priority is knowing whether or not you’ll be a pain-in-the-butt tenant. The rest is less important, which gives you ample opportunity to negotiate the lease in your favor in these other areas.

One way to save a significant amount of stress, and money on your attorney fees, is to send your landlord a list of your requirements before they send you the lease. This is often called the Letter of Intent. The items below are good things to include in your list.

Here are the first 13 things to negotiate in your commercial lease. The next 12 I will publish next week to keep both articles at a reasonable length.

1. The Term

A key difference between residential and commercial leases is the term. In residential leases a 1-year term is common, whereas in commercial leases, 3-10 year terms are more common. You can negotiate for a shorter term, and usually the smaller the space the shorter the term you can get away with. It’s common for 1-room leases to be month-to-month, and for whole floor or whole building leases to be 7-10 years. The term of a lease is highly negotiable.

2. The Rent

The rent in a commercial lease is typically expressed as “X per square foot.” This variable is the amount per year per square foot of space you are renting. For example, if you’re renting a 2000 square foot space and the rent is $45/sf, this means per year you will pay $45 per square foot x 2000 = $90,000. This comes out to $90,000/12 = $7,500 on a monthly basis. 

3. The Security Deposit

One of the many things that are different about commercial leases vs. residential leases is security deposits. In a commercial lease, a 2-3 month security deposit is a market standard in many areas of the country. This doesn’t mean that you can’t get your landlord to agree to a 1-month security deposit or a smaller security deposit, but just know that 2-3 months is the standard. For a 1-room sublease, a 1-month security deposit is standard. 

4. Access

Make sure that your lease allows you access to your space whenever you need it. 24/7 access is not standard everywhere, so if working in the evenings and on weekends is important to you, make sure 24/7 access is specifically stated in your lease agreement. If it’s not specifically stated in the lease, then assume it won’t happen.

5. Insurance

It’s standard for landlords to require tenants to have business liability insurance and to require tenants to place the landlord as an additional insured on the policy.

6. Buildout or Tenant Improvement Allowance

It is common in commercial leases for a landlord to pay for some or all of the expenses related to making the space look and feel the way the tenant wants it to be. This is called the buildout, or the Tenant Improvement Allowance or TA. The longer the lease term, the more attractive the lease is to the company that provides the commercial mortgage on the landlord’s property. Landlords love long lease terms for this reason. The longer the lease term, the more of a TA you can negotiate. 

The TA is usually given as an amount per square foot. For example, if you’re leasing 5000 square feet, your TA may be $50 per square foot. This would be a very generous TA. TA is typically comprised of construction costs and fees, including plumbing, fixtures, and electrical, but not including furniture. Oftentimes landlords will ask tenants to spend the money first and then submit the expenses for reimbursement. This works well if you have the money and a good general contractor with whom you’ve worked with before. For tenants who are leasing commercial space for the first time, it's often better to negotiate that the landlord’s contractor does the work and no money is paid by the tenant for the agreed-upon construction. If you’re renting a space for say $45/sf per year a $4-15/sf TA would be market (up to 30% of your first-year rent).

7. Free Rent

Another potential perk of commercial leases is free rent. It is common to get 2-6 months of free rent on a lease that’s 3-10 years long. 

Be careful about the timing of the free rent, however. If you get 3 months of free rent that’s great, but if those 3 months are at the end of the lease, it’s not nearly as great as it would be if they were at the beginning. Also, make sure you are not paying rent during the buildout period.

8. The Ability to Sublease

The ability to sublease to someone if you decide to leave early or want to downsize by a few rooms is key. Landlords usually do not like to allow this, but this can be mitigated by allowing the landlord to approve every potential sub-tenant and requiring some sort of objective creditworthiness of all prospective subtenants.

9. The Ability to Terminate The Lease/Good Guy Guarantee

Most landlords have mortgages on their buildings and, to their mortgage lenders, having leases that have long terms is very important. It’s a little less important what the leases actually say. Using that logic, you can negotiate for a 10-year lease with a landlord and get lots of concessions for that. Negotiate to get a 60-day or 6-month notice period and a small penalty should you want to cancel your lease earlier.

Another version of this is the Good Guy Guarantee. This is especially popular with NYC leases. Here is how it works: 

If you’re a tenant and you (i) personally guarantee your lease, (ii) want to vacate the space early, (iii) pay rent through the date you leave, and (iv) leave the space in clean condition, you’re a “good guy” and your personal liability will be limited. The landlord will not seek the future unpaid rent from you. This gives your landlord the security of a personal guarantee, and at the same time, you get to walk away early if necessary. 

NYC commercial landlords favor this provision because the eviction process can often take a year, so they would rather just get rid of the tenant who can’t pay than have to deal with court and attorney costs, years of litigation, and no rent.

10. Personal Guarantee

The unfortunate reality is that, unless you’re a larger company, your landlord will most likely insist on you personally guaranteeing your commercial lease. You can try to negotiate out of this provision, but it’s not common for landlords to rent to a startup or a small company without a personal guarantee. If your landlord insists on a personal guarantee, try to negotiate for it to work like the Good Guy Guarantee above.

11. The Ability to Extend the Lease

Moving is stressful and time-consuming, so the ability to extend your lease on favorable terms is important if you love the location or space. Once you’re in the space, you become a little bit captive and inertia sets in. Your landlord knows this. This is why it’s important to think ahead and negotiate your ability to extend the term of the lease ahead of you moving into space. Your best bargaining position will be before you ever become a tenant.

A typical yearly rent increase in a commercial lease is 2-4%. This is something you can negotiate, and typically the lower the initial rent, the more likely your landlord is to try to put in a 4-10% rent escalation into your lease.

12. The Security of the Space 

If you’re planning to have valuable items in the room, make sure to ask about who else will have access (for example, the building cleaning staff) and if you’re allowed to change the locks, etc. Put all this into your lease. If you want to install an alarm system, put that into the lease as well.

13. Property Taxes/Operating Expenses/Common Area Maintenance  

The most common type of commercial lease in the United States is a triple net lease. In a triple net lease, the tenant pays for the ongoing expenses of the property, including real estate taxes, building insurance, and maintenance of the common areas, in addition to paying the rent and utilities. These expenses are typically paid for by the tenant in the proportional share of the tenant’s leased property to the total property. 

For example, if you lease 10% of the total available space in the building, you would pay 10% of the property taxes. Sometimes landlords try to do funny things like make tenants pay tax for vacant building space, or make tenants pay estimated taxes ahead of time to the landlord yearly. All of the tax provisions are completely negotiable. Operating expenses or Common Area Maintenance (CAM) costs can be anywhere from $5-$15 per foot in addition to rent, and can be much higher in highly amenities buildings.