Monday, July 2, 2012

Understanding your Commercial Lease - Options, Outgoings and Other Terms to Know

Have you found your first office space or are you expanding and moving into larger premises? When it comes to commercial property for sale or lease, there are numerous legal terms and definitions to understand - not to mention that a typical commercial property lease can be up to 70 pages long. It's important that businesses get professional legal advice when it comes to negotiating lease terms and understanding the agreement that they are about to enter into. However, an initial understanding of the terminology and the important conditions surrounding a commercial property lease will help you find a property that's right for your business.

Entering into a lease is usually a considerable commitment for both the landlord and tenant and you'll want to make sure you set terms that will fit your needs.

Among the many points you will need to understand, some of the most common items to be found on any commercial property lease will include:

Term and Options - most commercial leases include a fixed lease term and then an option to extend the lease for another term. For example a 1 x 1 lease would be a lease term of 1 year with the option to extend the lease for an additional year so long as the tenant is not in default. You will want to consider the length of time you wish to stay on the premises and the investment you'll be making in the goodwill" of your company by staying there. Tenants will need to exercise their option within a certain amount of time that will be specified in the lease. Once the lease term and option expire, it is up to the tenant and landlord to renegotiate a lease.

Rent Review - how often will the rent be reviewed and what are the terms for increasing the rate? Many landlords will peg the rent to the Consumer Price Index while others will change the rate based on market demand. Rent review can greatly affect your business operations, especially if you plan on locking in a long term lease.

Sub leasing and Assignment - if you're a small business just starting out, you might consider leasing larger premises and then sub leasing or assigning the extra space to another business temporarily. If you want to assign your lease to another party, you'll generally need to get the landlord's approval, but you'll want the process to be a relatively streamlined straightforward, without exorbitant costs.

Outgoings - these are the costs incurred by the landlord for maintaining the common property, such as bathrooms, foyer areas, lifts, security and other overheads. Outgoings are usually factored into the rental rate based on the floor space of the leased premises (if you are leasing 2% of the total available floor space in the complex, you will be responsible for 2% of the outgoings). Depending on the type of lease you enter into, outgoings will be charged differently; in a net lease you will have to pay outgoings on top of your rent (to be calculated month to month) while in a gross lease, the outgoings have already been factored in to the rental rate and will be subjected to the rent review process.

Finding the right office space is like hunting for your own home - you want to make sure you won't be facing any unpleasant surprises down the track. Ask questions regarding the maintenance of the common areas, and try to find out everything you can about other tenants' experiences with the property. Gaining a better understanding of common lease terms will help you find a place that is the best fit for your business.

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