Common Legal Mistakes in Commercial Lease Negotiations — and How to Avoid Them

Commercial real estate transactions are complex and leases must be carefully negotiated. If you are a tenant, you must conduct your due diligence and take the time to properly prepare for a commercial lease negotiation. Failure to do so can result in numerous pitfalls that could otherwise have been avoided — and harm to your business and its bottom line. The following outlines some common legal mistakes to avoid when it comes to commercial lease negotiations.

Overlooking the Future Needs of Your Company

Many businesses only focus their real estate strategy toward their short-term goals. However, the term of a commercial lease can be lengthy — and it’s crucial to consider the future needs of your company. You should negotiate a lease that will accommodate the growth of your business. For example, you may benefit from a right of first refusal clause that allows you to claim additional space in the building once it becomes available. In the event the future of your business is uncertain, you might consider negotiating an assignment or early termination clause that gives you the option to leave the space before the lease term expires.

Not Anticipating the Type of Space and Square Footage You Need

The type of space and amount of square footage you will need is critical when it comes to negotiating a commercial lease. You will not only need a space that is large enough for your business operation, but you should consider the location, whether the space must come with certain equipment, parking, and accessibility. If you might want to make changes, modifications, or alterations to the space during your tenancy, this should also be considered during lease negotiations. A repair and maintenance clause should also be included that clearly outlines each party’s responsibilities when it comes to the rented space.

Failing to Understand Your Commercial Lease Options

There are many ways a commercial lease can be structured. For instance, with a gross rent lease, you would pay one amount to the landlord that covers the base rent, utilities, and any incidentals. Similarly, a modified gross lease specifies that you and the landlord will share the incidental costs. Another type of lease to consider is a net lease which allows you to pay the base rent along with either the property taxes, insurance, or utilities — the landlord would pay for the other expenses. Other common options can include a double net lease (in which you pay the base rent plus insurance and property taxes) or a triple net lease (in which you would typically pay the base rent, property taxes, building insurance, utilities, and maintenance costs).

Not Considering Zoning Issues That Could Affect Your Business

One of the first questions to ask before you can engage in commercial lease negotiations is whether the property is zoned for your intended use. Importantly, zoning laws specify what type of businesses may operate in a certain area. Failure to consider zoning can mean that your planned use of a space may not be permitted. Your lease should also be contingent upon whether you are able to obtain any necessary permits, licenses, and approvals from the state or local government associated with your specific use.

Failing to Conduct a Due Diligence Investigation

Before you can effectively negotiate a commercial lease — and ensure your interests will be protected — you must conduct due diligence. You should thoroughly investigate the property, its condition, and the average market rate in the area. It’s also a good idea to conduct a due diligence investigation into the environmental conditions surrounding the property and whether there are any liens, zoning violations, or other issues. In addition, you should consider whether the mix of tenants and your neighbors in the building are compatible with your business.

Attempting Commercial Lease Negotiations without Counsel

Commercial lease negotiations are complicated and it’s essential to have an experienced real estate attorney by your side. By attempting negotiations without counsel, you may inadvertently make costly mistakes that could impact your business for years to come. A skilled real estate attorney will know what to look for when reviewing a commercial lease and can negotiate favorable terms on your behalf that protect your interests and advance your objectives. They will also have insight regarding property values and market values which can be advantageous during the negotiations process.

Contact an Experienced California Commercial Lease Attorney

Negotiating a commercial lease agreement can be daunting and overwhelming. It’s best to have a commercial real estate attorney by your side who can help ensure fair terms are negotiated that safeguard your interests. The experienced commercial real estate attorneys at White and Bright, LLP provide dedicated representation to commercial tenants and landlords for a broad scope of real estate matters, including those involving lease negotiations. We welcome you to contact or call us at (760) 747-3200 to learn more about the legal services we provide.