Once you have signed a commercial lease agreement for an office, it is too late to make any changes. For businesses, it is crucial to understand the fine print of the lease terms, how it will impact them, and how they can negotiate the best deal possible.
As new work models force companies to reevaluate their office spaces, an increasing number of companies are renewing their commercial leases to fit in new terms or looking for new office locations that would offer the most benefits to the business and its employees.
Negotiating a commercial lease can be a difficult process, but understanding how to approach it can help reduce the risks of any negative effects on your business. Before signing a business lease, it is important to assess various lease options, as well as your business needs and costs. Researching market rents and comparable commercial properties is crucial for negotiating rent and tenant improvement.
By assessing your current and future space needs, you can negotiate a commercial lease that is aligned with your business goals and culture.
Businesses Need to Exercise Patience to Lease an Office Space
The process of negotiating an office lease can extend for several months or even a year. The process involves managing multiple offers from various landlords, getting a Letter of Intent, getting your lease document implemented, and dealing with various issues that may crop up before moving in.
Before you start the negotiation process for your office lease, you need to go and find properties and landlords with whom you want to start a negotiation. Your goal should be to receive competitive offers by comprehensively researching the market to find spaces that suit your business needs. You can then book tours of the space and send out requests for proposals (RFPs) for spaces that you like.
You need to figure out how to counter each landlord based on your needs. Some landlords might drop out, while others will still be willing to go through a few more rounds of negotiation with you. The more you talk to them, the more you will be able to get out of them.
Once the negotiation process has been concluded, you and the landlord will sign an LOI or another document that shows your intent to lease out the commercial property. Keep in mind, though, that once you have signed the leasing agreement, there is a chance that some issues will crop up that might require you to negotiate further. These can include all manner of issues, from which door you can use to enter your suite to whether you need to use the building’s catering service to order lunch for your employees.
Let’s take a look at some aspects that businesses need to review for a successful leasing process.
Market Research
To get an office space, you need to make yourself more knowledgeable about leases for other buildings. Whether you need to stay at your current office or move to a new one, market research will give you an understanding of what options are available to you and reveal a more competitive leasing solution than your existing one.
Some things that you need to keep an eye out for during the market research process are checking the market rents in the neighborhood and comparing them; searching for any red flags in your landlord’s reputation; looking at the tenants in the building to ensure they are compatible with you; finding out the building’s traffic, and assessing the condition of the commercial property for improvements and repairs.
Evaluating Your Business Needs
It is essential that businesses do some homework before entering into a lease negotiation. Some things you need to figure out are: your company’s current and future workspace needs, your preferred location, and your budget. In addition, your business structure and nature and your length of time in the business can also affect the negotiations.
Landlords will be more inclined to negotiate a lease with you if you are an established company with good growth prospects. If you are interested in long-term expansion, you can leverage this to get a better price.
However, if you are not sure about what you will need in the near term, it is a good idea to explore shorter lease options that may range from about two or three years that offer you more freedom and flexibility when it comes to your commercial space.
Surveying Employees to Understand Their Needs
If you are planning to relocate, then location is just one factor you need to keep in mind. If you are an employee-conscious company, then you will also need to look at amenities that support employee well-being, promote good health, and are flexible and sustainable.
Employees are increasingly demanding a plethora of amenities from their employees, including access to nearby eateries, fitness centers, and transport. Inside the office, employees are interested in getting breakout spaces, efficient lunch spaces or cafeteria, green spaces, and flexible workstations.
The requirements of offices are now quickly changing and businesses are striving to create a reimagined and modern workplace for their employees that support hybrid working as well as health and safety.
Creating Design Ideas for Office Search
Before you get your heart fixed on an office, you first need to determine what kind of working area you need. This includes finding out how many offices or rooms you will need, what type of seating each will have, and how your employees will be arranged. You should also consider whether your office requires a sustainable or “creative space.”
A creative office design can help make a more open and collaborative work environment, where employees can easily communicate with each other, leading to brainstorming opportunities and more efficient work. A sustainable office design, on the other hand, involves a number of factors focused on your employees’ health and wellness, which can drive better productivity and employee satisfaction.
Options for Scaling Up
If you are a startup or a business that expects growth in the future, the last thing you want is to get an office lease for a space that cannot be expanded and then to expect a large number of employees who have no dedicated space to work in.
If your lease does not have the potential to scale up, you will be left with no choice but to get out of your lease – which can be quite expensive if you need to leave before your term is over.
Before deciding on a commercial space, it is important for you to look at several buildings and landlords who will allow you the flexibility you need to expand your footprint and give way to your company’s growth.
Incentives for Returning to the Office
Now that we have entered the post-pandemic era, businesses are encouraging their employees to come back to the office. In 2022, Envoy performed a survey that showed that 88% of businesses are using incentives to call their employees back to the office, while 77% have adopted a hybrid work model. On the other hand, about 61% of businesses made changes to their physical workplace.
Many businesses found that many employees were reluctant to come back to the office and wanted to stay remote but the use of incentives could help change their minds. The most effective incentive seems to be an “at-will” hybrid policy that allowed employees a flexible office attendance and allowed them to work from home on certain days.
To ensure this hybrid model was carried out effectively, many businesses made significant changes to their workplaces and considered this when expanding their office space or looking for a new office lease.
Not Paying Real Estate Taxes
Real estate taxes are usually the responsibility of the landlord. Tenants are only liable for taxes that they specifically agree to pay. Your lease should protect you from having to pay taxes that should be paid by your landlord like corporate taxes, income taxes, capital gains taxes, payroll taxes, inheritance taxes, etc. When signing a lease, it is important to pay attention to real estate tax clauses or any language that makes you responsible for undefined taxes that may be imposed by a government authority.
You should also carefully read the fine print on your lease contract to see if there are any special assessments included with your real estate taxes, such as charges for new sewage lines, sidewalks, etc. If you are paying assessments, which are not real estate taxes, then you are giving your landlord much more than you are liable to.
In some cases, the landlord might contest high taxes to increase the value of their commercial property. Make sure your lease allows you to capitalize on any tax benefits your landlord or other tenants gain once they have recovered their expenses.
Not Agreeing to the Restore Clause
One of the most overlooked aspects of an office lease is the restore clause. This clause mandates that the tenant needs to restore the leased space back to its original condition at the end of the tenancy. If you have agreed to this clause, this means you will be forced to repaint the walls, change the carpeting, repair the electrical and plumbing, and more, when you have already moved out of that place. It might also mean redoing any work you had done, like reinstalling walls, to get the office space back to the way it was.
This can mean tens, if not hundreds, of thousands of dollars out of your bottom line.
Instead, you should negotiate with similar language that would ensure the landlord gets their property back in the same condition as it was leased out, excluding ordinary wear and tear, an unavoidable casualty that is not the tenant’s fault, damage by fire, acts of God, and any alteration to the space approved by the landlord.
Changing the restore clause can help save a significant amount of money when you are moving to another place.
Request Co-tenancy
A co-tenancy clause allows a tenant to request reduced rent if the total occupancy of the commercial building drops below a certain level. Co-tenancy can save you substantial money over the year; however, there are a few things that you need to consider when getting co-tenancy.
You need to make sure that your business complements the other tenants in the building and works well with them. Some things that you need to discuss are the kind of demographic you want to attract, what kind of services you provide, and your business hours.
Request Tenant Improvement Allowance
A tenant improvement allowance is the fund given to a tenant by a landlord to make improvements to the office space or cover the costs associated with making the office a perfect fit. The exact amount of tenant improvement allowance needs to be negotiated in the office lease, along with what it can be used on.
Since a tenant improvement allowance does not need to be repaid, it can be a big incentive for tenants to sign a lease. If you are considering performing some renovations on your new office space, getting a tenant improvement allowance is an important part of the negotiation process.
Bottom Line
So there you have it. These are just a few of the creative tips that business tenants use to negotiate excellent office leasing. When negotiating the lease, it is very crucial to know your business’s value in the market so that you can leverage it for maximum benefit.
The landlord will be more likely to negotiate with you if your lease comprises 25% of a larger property, rather than if you hold just 5% of space – which is something to keep in mind.
Make sure you use the services of a commercial real estate lawyer to review the lease documents and help you out with complex negotiations, particularly if your landlord is tight-fisted. A capable attorney can weigh all the benefits and risks and help you decide when a lease is worth it or when to split up and run.
