As interest rates remain elevated, many business owners are choosing to lease rather than buy commercial spaces to operate their businesses.

Leasing commercial space provides a business owner with flexibility to start or expand their business. It reduces the upfront cost required to open a physical location. It protects against risks associated with property ownership. It also controls the length of time that the business will operate in the commercial space.

When negotiating a commercial lease for business or retail space, three important factors that should always be considered.

Improvement Allowances
If a tenant intends to make improvements to the leased space, the tenant should negotiate the lease to include a “tenant improvement allowance.” A tenant improvement allowance is designed to cover the cost of improvements that a tenant will make to the leased space that will remain the property of the landlord after the lease expires.

A tenant improvement allowance can reduce the out-of-pocket expenses associated with installing fixtures, utility systems, and high-end finishes; which can allow the tenant more flexibility to save out-of-pocket funds or use out-of-pocket funds for marketing and business development.  

Renewal Options
A tenant should include segmented renewal options with a predetermined rent amount for the overall term of the lease, rather than one longer term. For example, a tenant will have more flexibility in its business planning if it enters into a lease with a term of one year with nine one-year renewal options, rather than a lease with a set term of ten years.

Including renewal options allows a tenant to move locations if desired, and provides the tenant with additional leverage to negotiate with the landlord if the landlord wants to keep the tenant in the commercial space as the expiration of a given option period.

Risks and Warranties
The tenant should also require certain representations and warranties from the landlord in its lease regarding the condition of the property to protect against risks associated with the property being leased

For example, a tenant should require representations and warranties that (1) the landlord is not aware of any hazardous substances on the property as of the commencement date of the lease, to protect against risks associated with the environmental condition of the property; (2) the property will continue to have adequate access through the driveways and parking areas of the property, to protect against risks associated with driveway and parking lot repairs; and (3) that no other portion of the property will be used for any use materially similar to the tenant’s use, to protect against risks associated with competing commercial businesses in the property.

For more information regarding commercial and retail leases, or real estate transactions in general, contact Robert Kravets at rkravets@foxrothschild.com or 215.918.3621.