New businesses should be aware of the terms before signing a commercial lease, says Graham Rawlinson in Financial Post

Negotiate Before Signing a Commercial Lease

June 18, 2012

There’s no overstating the importance of location for any budding business. One of your first and biggest issues will be renting space, perhaps from a shopping mall or office complex. Negotiating and signing a commercial lease involves several issues that might catch you off guard.

Master the terminology that goes into these agreements. Take the issue of term. You might be signing an agreement that covers something like five or 10 years, but you also need to be thinking about what might happen after that. You should be looking for something that gives you an option to renew the lease or extend the length of the agreement.

"You lose a lot of leverage if you don’t have some kind of extension right," says Graham Rawlinson. "That's something that often clients don't focus on at the beginning, especially new businesses."

You also need to protect yourself if you need to close shop or move before the end of the lease. You can try to negotiate termination rights, where you ask the landlord to let you out of the deal early, provided you pay a penalty. It's a long shot, but you can ask for it. A backup plan might be to inquire about subleasing rights, Graham suggests. "A tenant, looking ahead, might say to the landlord that if you won't give me a termination right, at least allow me to sublet."

When it comes to rent, understand the difference between a gross and a net lease. A gross lease involves rent that comes with a single, all-in number that covers not just your space, but also your share of the operating costs associated with running the property. These are relatively rare. What you're more likely to encounter is a net lease, in which all those operating costs are piled on top of your basic rent. These figures can add up. In fact, sometimes they can be higher than the basic rent you thought you were going to pay. "For a tenant going in, that might come as a bit of a surprise," Graham says.

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