How to Secure the Best Terms for Your Commercial Lease

Commercial property leasing is a different world from its residential counterpart. Investors who have always invested in residential and switched to commercial find the process and legalities challenging.

Commercial real estate includes many more property types, such as retail shops, offices, warehouses, and so on. Often, different laws apply, which adds to the challenge of negotiating leases.

But you must hone your negotiation skills, as everything about commercial property investment, from purchasing to securing leases, is up for negotiation.

Commercial property buyers should engage legal representation early in the sales process to secure the terms they need for the investment to be worthwhile.

Here are four tips on securing the best terms for your next commercial lease.

1. Use Electronic Platforms

Commercial lease terms can get complicated in a hurry, and you should use an electronic document repository at the very least. However, problems can start right from the beginning. Searching for commercial properties can become a headache if you don’t do it right.

Traditionally, commercial property lessees contact specialized realtors who handle the transaction. Not every commercial property is listed for rent, and even when it is, it comes with many attached terms. For instance, the lease terms might not suit the lessee, or the landlord might be looking for a specific type of tenant to preserve the tenant mix.

An electronic platform can simplify understanding all these terms. In effect, the platform turns these terms into filters that lessees can use to narrow down their choices. The commercial real estate platform Floorly allows you to browse available rental spaces without hiring a realtor. You can also see existing property bids, and buyers can adjust offers accordingly. You can also sign all documents electronically.

Electronic platforms aren’t yet widespread in commercial real estate like they are in residential properties. However, using one can help remove many of the challenges associated with the leasing process.

2. Review Essential Terms

Commercial leases are complex, with terms that can confuse even the most seasoned investor or lessee. Lessees must review all terms and understand their meaning before signing off. For instance, what kind of lease is it? A triple-net lease carries very different connotations from a standard lease.

It has financial implications for the lessee’s business. Revenue-sharing models must also be clearly understood before signing. A commonly encountered source of confusion is revenue versus profit sharing. Some landlords confuse the two terms, leading to disputes.

Calculating the bottom line can also be confusing, even when both parties agree to share profits. Which costs should be considered? Does profit pertain to the store, and do ancillary costs have to be included in the calculation? These factors matter to both parties and must be understood before signing.

Breakaway clauses and maintenance responsibilities are a perennial source of conflict in real estate, whether residential or commercial. All parties must negotiate these terms clearly and ensure the lease specifies all relevant conditions.

3. Learn from Neighbors

Before signing on the dotted line, it helps to speak to existing tenants and their neighbors. What is the commercial footfall like, and is it sustainable? How do seasonal patterns play out? What red flags should you watch for with a landlord?

Some landlords charge high rents and neglect to form partnerships with their lessees. This is a huge red flag, and high turnover rates are the surest indication of a greedy landlord. If leasing in a larger commercial space like a mall or a shopping center, inquire about special terms such as standard area maintenance charges, revenue sharing, POS connections to the mall’s servers, and other issues.

Talking to neighbors also helps flesh out finer details in the lease deed. For instance, malls often have strict opening-hours requirements for lessees.

• Are these sustainable hours?
• Does it hurt the lessee’s business to remain open at all times?
• Can clauses give the operator leverage?

Talking to existing lessees is the best way to figure this out.

4. Remember Your Needs

Lessees often get lost in the excitement of signing a new lease and forget to prioritize their needs. An excellent example is ignoring a radius clause in the lease agreement. Radius clauses are essential to ensuring a good tenant mix. A good landlord will always include them by default and mention them unprompted.

A landlord or property operator who doesn’t prioritize this clause will harm all their tenants, and high turnover rates will signal a problem. When signing a new commercial property lease, you won’t have much data to go on. In these cases, the operator’s reputation can offer clues about how well they’ll meet your needs.

Talking to the owner will also reveal their views on your needs. How will they handle liability claims, and how open are they to prioritizing your needs? Examine everything and put yourself first.

Flexible but Complex

Commercial leases are incredibly flexible, but they can get complicated if you don’t pay attention. The four points above will help you secure the right terms and protect your interests.