As a tenant, what should I consider when renting an office or commercial space?
In order to lease an office or commercial space, you will need to sign a commercial lease with a landlord. Unlike residential leases, which in Oregon and Washington are regulated by laws that are highly protective of residents, a commercial landlord and tenant have the flexibility to structure their lease as they see fit. This flexibility may introduce risks for a tenant. As a result, it is important for commercial tenants to effectively negotiate and thoroughly understand their lease.
Commercial Lease Terms
Some of the typical terms, and points of negotiation, in a commercial lease include:
- Rent – Often includes base rent, “additional” rent (which may include some or all of the cost of utilities, maintenance and repairs, and property taxes for the premises), and rent escalation
- Security Deposit – Covers various potential costs of the landlord
- Payment Terms – Often includes interest due on late payments
- Term & Termination – May include a fee for early termination or the right to terminate upon major damage to the premises
- Renewal Option – May grant the tenant the option to renew the lease
- Tenant Improvements – Allocates the cost of preparing the premises for tenant’s use
- Maintenance & Repairs – Allocates maintenance and repair obligations
- Alterations – Details the tenant’s right, if any, to make future alterations to the premises
- Use of Premises – May outline permitted uses, including hours of operation
- Common Areas – Details the use and maintenance of building common areas
- Insurance – Often requires the tenant to acquire coverage for liability from acts or events occurring on the premises and damage to the premises
- Guaranty – May ask for a personal guarantee from tenants seeking to rent a commercial space in the name of a business
- Indemnification – May include a right of the landlord to have the tenant defend them should they be sued as a result of the lease
- Assignment – May allow the tenant to assign or sublet the lease
Commercial tenants will likely want to reduce or eliminate, if possible, any obligation they have to pay “additional” rent, repair or maintain the premises, personally guarantee the lease, or insure or indemnify the landlord. Many tenants are able to negotiate an initial tenant improvement budget with the signing of a new lease. Tenants may also benefit if they have flexibility when it comes to altering the premises or using the premises, and if they have the ability to terminate, assign, or sublet the lease at their will.
In order to negotiate the best deal possible, a tenant must identify when market conditions justify more favorable terms than a landlord has proposed and which direction the market is moving. A well-negotiated commercial lease can contribute to a business’s success, while an unfavorable lease can substantially impair a business. Therefore, businesses should adequately vet any lease before signing it, and evaluate their need for low costs and future flexibility.