By: Rose Massary & Shaliz Sadig
Whether you’re a startup looking to move into your first office, or a small- or mid-sized business (SMB) trying to expand or relocate, finding the perfect commercial space may help take your business to the next level. Negotiating a commercial lease in New York can be a time-consuming and overwhelming process. Before executing an Agreement of Lease, consider these helpful tips:
1. Timing is everything.
Give yourself 6 to 9 months to secure a new lease for your business. Although it may seem like an excessive period, the time will fly while:
- finding a new space;
- negotiating reasonable deal terms and executing a lease;
- obtaining necessary building permits and waiting on structural improvements or renovations;
- modifying your business’s office services (such as mail, internet and phone);
- purchasing any needed furniture or office equipment;
- obtaining insurance required for the new building; and
- moving in.
You wouldn’t want to be in a position where you are forced to rush and make a hasty business decision or fail to properly prepare for the change.
If you’re currently renting an office space, you want to give yourself as much lead time as possible to secure a new lease. Many commercial leases contain “holdover” provisions that obligate a tenant to pay higher fees if they do not vacate by the expiration of the lease term. If you run out of time and must stay in your current space, you may have to pay double, or even triple, the amount of monthly rent until you vacate.
2. Get a broker and an attorney on your team.
In New York City, broker fees for commercial leases are customarily paid by the landlord. At no additional cost to your business, you can have an experienced broker assist in finding your space and negotiating lease terms.
Generally, brokers are paid a percentage of the annual rent: the higher the rent is, the higher the commission. Because your broker will be paid according to the price you settle on, it’s important to be active in the negotiation process and be sure that your broker understands your bottom line.
Discuss the right neighborhood for your business with your broker. New York City may offer tax abatements that can reduce your rent in lower Manhattan, if eligible.
The broker can facilitate negotiations and secure the main deal terms, such as price per square foot, term, security deposit and rent. Often, the broker will negotiate a simple term sheet with the landlord, summarizing the main deal terms of the commercial lease. Your lawyer can review the lease agreement in detail to ensure that (i) the agreement is customary and reasonable, and (ii) that it accurately reflects the term sheet. Leases are generally drafted by the landlord and (no surprise) tend to favor the landlord. Your lawyer will aim to push back on landlord favorable terms to even the playing field and to negotiate more advantageous and protective clauses. (More on this to come in the next blog.)
3. Think long term.
A startup or SMB owner may think that a short term lease is better for business. After all, it’s hard to commit to anything for a substantial period of time when you don’t know what direction your business is going to take.
Well, think again. Landlords usually favor long-term leases and are often willing to make certain concessions to new tenants who commit to longer lease terms. They may be willing to lower monthly rent, provide additional renovations, or even offer several months of free rent in exchange for the commitment. If you are able to negotiate provisions for early termination or lease modification (as discussed below) it may be a commitment worth making.
4. Rent, fees and escalations – oh my!
In addition to base rent, commercial leases often contain fee provisions for cleaning, water, electric, taxes and maintenance. It’s important to figure out exactly what your rent payment includes and what additional monthly or annual charges you are obligated to pay.
Generally, the base rent in commercial leases increases on an annual basis. To expedite the negotiation process, sometimes tenants agree that rent escalations for each subsequent year will be negotiated by the parties at that time in accordance with the, then current, fair market value. Although such a provision may save time negotiating, it is advantageous to get all the future prices set in writing at the outset of the business relationship. If you do not agree beforehand, you may not have leverage to negotiate competitive prices in the future.
5. Find an escape route.
Negotiate ways to terminate, renegotiate or relocate before the lease term expires – just in case. This may come in several forms:
- Termination: The lease may provide for termination of the agreement. Generally, termination provisions are landlord friendly and obligate the tenant to provide substantial notice and/or cancellation fees.
- Assigning and subletting. You may be able to assign or sublet the space to another business in the future.
- Right of first offer. If the landlord owns other buildings or spaces, you may be able to carry over your lease to a different office if your business structure changes during the lease term.
Negotiating a commercial lease can be a complicated process. Remember to give yourself enough time and have a team of experienced professionals looking out for your business’ best interests. Securing a great office space can be very valuable for your startup or SMB.
Are you considering a new office location for your business?