As a landlord, what should I consider when leasing my commercial space?
The flexibility that a commercial landlord and tenant have in structuring their lease allows the parties to develop a lease that closely matches their intentions. This is often to the commercial landlord’s advantage, since many landlords have a superior bargaining position in lease negotiations due to market conditions and market knowledge.
Some of the typical terms covered in a commercial lease have been briefly outlined in a previous blog post. Many of these terms are likely to be included in any commercial lease in one form or another, though they may favor the landlord or the tenant depending on the circumstances. For commercial landlords particularly, you will want to consider the following.
Amount and Structure of Rent
Commercial landlords will likely want to maximize their return through the amount and type of rent the tenant must pay. It is often to the landlord’s advantage to require the tenant to pay:
- Additional Rent – Covering the costs of utilities, maintenance and repairs (if the tenant is not otherwise obligated to perform these), and property taxes for the premises;
- Escalated Rent – Increasing the base rent on a yearly basis for the term of the lease; and
- Stepped-Up Rent – Allowing for an adjustment in rent at the time of renewal to the greater of the market rate at the time of renewal or the escalated rent under the original lease, if the lease grants the tenant the option to renew.
These are a few of the many ways landlords can structure rent payments to cover the costs of their commercial space and earn a profit as well.
Commercial landlords can also protect their interests in a number of other ways. It is generally to the commercial landlord’s advantage to have the tenant agree to:
- Security Deposit – A large security deposit prevents loss due to damage or non-payment;
- Guaranty – Some type of guarantee or security interest to secure rent payments, including a co-signatory or personal guarantee;
- Insurance & Indemnification – Generous insurance and indemnification protection;
- Restricted Assignment – No right of the tenant to assign or sublet the premises, or in the alternative, the landlord’s right to block an assignment or sublease to an unsatisfactory party;
- Extended Lease Duration – So long as rents are not fixed, and in some way match increases in the market generally, a long-term lease prevents extended or unexpected vacancies;
- Limited Use – Limited uses of the premises by the tenant in order to minimize or avoid liability from hazardous or dangerous uses; and
- Right to Inspect, Supervise, or Approve – The landlord’s right to inspect, supervise, or approve actions taken by the tenant affecting the premises.
These are just some of the ways that commercial landlords can protect themselves and their investment through a well drafted commercial lease. Commercial landlords may also consider taking advantage of various resources available to them, such as the resources provided by BOMA Oregon, the expertise and insight of an experienced commercial real estate broker, or the advice of a competent attorney. These additional resources, and others, can prove to be invaluable resources in helping a commercial landlord to identify qualified potential tenants and negotiate and sign the best possible lease.