Entering into a new commercial lease offers greater flexibility compared to taking over an existing one, as both the tenant and landlord can freely negotiate the terms. If you’re a commercial tenant who is considering negotiating a new commercial lease, here are three crucial factors to keep in mind. Let’s explore them in this article.
Rent review
For long-term leases, e.g., leases over 5 years, a rent review clause is standard. This clause outlines how and when rent will be adjusted. A common approach is using open market rent valuation, where rent increases align with market trends. If market rents rise, your rent may increase significantly – potentially straining your budget. However, if market rents fall, your rent typically stays the same rather than decreasing. Alternatively, rent can be reviewed based on fixed increases – either a set amount or percentage. This method offers predictability, but it means rent could rise even if the market declines. Whichever method is chosen, it’s essential to negotiate rent review terms early in the leasing process.
Break clause
It can be financially onerous for a tenant to commit to a 10-year or even longer lease, especially if this is his/her first time doing business. To manage the risk, you may consider negotiating a break clause with the landlord. A break clause means that one party or both parties can terminate the lease in advance on the break date. The break date will usually be within the first few years of the lease term or sometimes be set at the halfway point of the lease term. This gives tenants flexibility if the property turns out to be unsuitable or if the business struggles.
However, although a break clause can be beneficial to the tenant, most landlords may not welcome it – they may prefer to choose a more stable tenant so that they do not need to worry about renting out the property again in just a few years.
Rent-free period
When leasing a vacant property, you may need time to carry out renovations or fit-outs before opening your business. Depending on the workloads of the alteration, it may take a few weeks or months before the business can officially launch to the public and the alteration costs can be extensive. During this alteration period, there can be no income from the business, while you are still required to pay the rent according to the lease. Negotiating a rent-free period can ease this financial burden, giving you time to get your business up and running before rent payments begin.
However, many landlords may be hesitant to agree to this, as it delays their income. To raise a rent-free period may also make the landlord question the tenant’s financial ability. Therefore, it needs to be considered carefully before raising it with the landlord.
Our thoughts
Securing a commercial lease with favourable terms can significantly impact your business’s success, both immediately and in the long run. Whether you’re starting out or expanding an established brand, always assess your bargaining power and negotiate strategically to protect your interests.
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