Commercial real estate market is not as standardized as residential real estate market is. Finding a commercial property that suits your needs might be a difficult task as it will involve understanding various nuances like zonal restrictions, rentals, etc. Here learning from one’s mistakes is very costly.
Once the property is identified basis infrastructure, demographics, etc. one needs to decide whether to buy the property or to enter into a lease. One may seek help from advisors, brokers, and accountants, etc. to make this decision. The decision involves in depths study of factors like rentals, tax implications, expected inflows from business, etc. Business owners prefer leasing out a property.
On the basis of the type of business & understanding between the landlord and the tenant any of the following types of the lease agreement can be entered into:
Percentage Lease: This type of lease is most common with the retail spaces. Under this, tenant pays a base rent along with a percentage of sales to the landlord.
Net Lease: Here the tenant pays all other expenses incurred in using the property commonly known as maintenance expenses, along with the rent to the landlord.
Gross Lease: Here all types of fees are included in the per square feet price.
In order to avoid confusion and safeguard against mal-practice one must check the following before entering into a lease contract:
First and foremost thing to know before entering into the lease agreement is the location. One must study and explore the neighborhood, submarkets and customer behavior to be successful in business. In case business is dependent on customer walk- in, give special attention to parking and security. Whereas for a manufacturing unit or a factory, connectivity with suppliers and transportation facilities are to be taken into consideration.
Understand the agreement
In the case taken lightly, one might end up signing an agreement completely in favor of the landlord as most of the time the agreements are simply signed without through reading. So, one must keep an eye on detail and discuss the lease agreement clause by clause. Many clauses in lease agreements are negotiable. The agreement should clearly lay down the rights and obligations of a tenant. Hiring a broker or a lawyer may also prove to be helpful here as they have an expertise in laying down the agreements.
Carefully decide the rent and tenure
Monthly rental will be an expense to be borne whether or not business kicks off well. So, it becomes very critical to agree on a rental that the business will be able to take the burden of month-on-month. Similarly, important is to decide on the tenure of lease. A short term lease with an option of renewal is safer.
You may be surprised to see the extent to which a lease is negotiable. Do not hesitate from listing down the list of clauses you are not fully in agreement with. Discuss them freely with the landlord and ensure to get the best deal.
Other related expenses
There are many expenses related to a commercial property. The contract should clearly lay down who will bear what expense. The expenses might be related to repair and maintenance or certain shared utilities. In commercial leases, costs related to repairs and upkeep of the property are to be borne by tenants. At times, the agreements also mention a limit on the amount to be spent on repairs by the tenant.
Handling rent increases
The lease agreement should clearly state how and when the rent will increase. By how here we mean that on what basis the rent will be increased by the landlord like, 10% a year, etc. Also, the agreement should be clear about the time period for which the rent shall remain constant. This will help the tenant to decide on the tenure of lease and also plan other expenses in advance.
Building additional space
Clauses or conditions, of expanding the available space in the property should be a part of the lease agreement. What all types of alterations are allowed on the property & who shall bear the cost of additions should be discussed and put in writing as a part of the lease agreement. In case the tenant is not starting the use till the time alterations are on, he might not be willing to bear the entire amount of rent alone.
These days it’s all about marketing and display. While leasing a property for commercial purposes, one must understand what is allowed and what is not allowed.
Sublease & assignability
In the case of expansion or in-affordability to pay rent, one must be allowed to sublease the property. Look for such clause in the lease contract. At the same time, in the event of the sale of a business the tenant can be allowed to assign the lease further to another party. Many a times, this clause is missing from the lease agreements.
Be ready with your exit strategy as well. Make sure that the lease agreement talks about it clearly too. In case you decide to leave the premise before expiry of the lease what will be the penalty. This is another point that can be negotiated well.
Nothing should be closed verbally in this business. Make sure, the lease agreement incorporates everything discussed regarding, rentals, other expenses related to the property, deposit, signage’s & lease termination. Involve some expert like an advisor, lawyer or an advocate to help you clearly understand the lease clause by clause.
Manish is founder of Business2sell Group of Websites.
Business2Sell.com.au is one of the leading business and franchise for sale listing websites. We work with our business brokers, commercial agents, franchisors and private sellers to help them connect with the right buyers for their opportunities.
With website now functional in Australia, United States, United Kingdom, Canada, New Zealand and South Africa. We have over 18,000 businesses for sale listed, with over 220 Business Broker and Commercial Agent.
I have over 20 years of experience in Web Industry; I have been involved in websites industry since the early years of 1996-97. In my professional career I may have worked for over 10,000+ websites. My Specialty is to build portals or complex online applications.
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