Did you know?
Leasing a space is an exciting milestone for any small business. But before you get the keys, you’ll typically have to sign a lease. And when it comes to fine print and legalese, commercial leases are often prime offenders. Take a few minutes to read this primer — it’ll save you hours of headaches in the long run, and give you some helpful pointers on how to negotiate.
What you should know
First, think strategically about space
There are plenty of good reasons for a business to lease a space. It creates a hub where employees and contractors can meet. It gives your staff a dedicated place to work. It provides a space for client meetings. All in all, it elevates your business out of the basement (often literally!).
But first ask yourself: Why do I need to lease a space? Consider these thought-starters:
What do your customers want? If you’re a retail space, this one goes without saying. But for some professional services businesses, the answer isn’t as clear. Maybe the space is a kind of calling card, to demonstrate your level of professionalism. Do you have many clients coming in, or are you mostly meeting with them virtually?
Will you have staff coming in regularly? This is a bigger consideration than ever, given the growing acceptance of flexible work arrangements. Some people don’t want to come to the office. Some do. Some want a mix. Consider polling your existing employees or contractors on how they feel about this. If you haven’t hired new people yet, think about whether your business truly needs to have folks on site all the time. The fewer bums in chairs, the smaller (and likely more affordable or better located) space you’ll need.
And what do your staff want? Do they ride transit? Then a more expensive office near a transit line might be preferable. Do they drive? Look into options with parking. Are you trying to entice top talent to work for you? Consider a space in a trendier part of town.
What kind of space do you need? Flip through the Instagram feed of any emerging tech company and you’ll see whitewashed walls, wood beams and leafy plants in trendy, open-concept spaces. It’s cool, but ask yourself if it’s what you really need. If your employees are on the phone all day, or if you have clients streaming in, walled-off spaces might work better.
Does your business require specific zoning? Some parts of town don’t allow just any business to operate there. And you can’t always count on a landlord to be alert for that — you’ll often be responsible for ensuring you have the right licences or permits.
Have you considered a shared work environment? Co-working spaces are very popular. And membership has different tiers — you can rent a hot desk, or a dedicated boardroom, depending on your budget. And these sorts of leases often include perks like internet and refreshments.
Before you sign, read your lease!
"I’ve signed a bunch of things as a small-business owner — service agreements, loan documents, employment contracts. But none were anywhere near as complex as my commercial lease. It was about 30 pages long, super fine print, and just so technical. The only thing I felt like I truly understood was the monthly rent and the date when the term ended. But I really liked the space, so I signed without fully understanding all my legal rights. My monthly rent is so much more than I expected; I should have gotten more clarity around all the common building expenses I was responsible for."
– Sean, Vancouver, BC
We get it. Lease documents are often long and convoluted. And not always changeable anyway — even if you find something in the wording you want to tweak, the landlord might not budge. So there’s a temptation to simply sign and be done with it.
But there’s every reason not to. Even if you can’t negotiate, at the very least, understand the key parts of your commercial lease. Doing so will help you budget appropriately and know what you can and can’t do after you sign. Let’s walk through some things you should watch for.
Gross versus net
Broadly speaking, there are two types of leases: gross and net. In a gross lease, you’re paying for the cost of the premises and all of the landlord’s incidental expenses. (Basically, anything that isn’t rent.) In a net lease, you just pay the cost of the premises, and maybe incidentals (like the electricity bill for your own space).
Then there are variations on a gross and net lease. Some gross leases are modified gross leases, where you share incidental expenses with the landlord. Some net leases are double net or triple net, where you have to pay two or three incidentals directly. There’s even the absolute net lease where, you guessed it, the tenant pays for everything.
There’s also the percentage rent lease, where you pay a base rent plus a portion of your monthly sales. These leases are common in malls.
Reading the lease will clarify which category it falls into. And knowing the lingo will help you keep a good poker face when asking questions or negotiating with a landlord.
How much you’ll be paying per month
Very often, this isn’t obvious. First, you have to understand the base rent. This is what you’re paying for use of the space. It’s often expressed as a price per square feet. And the square footage quoted by the landlord may be very different from the actual “usable” space — make sure you do a walkthrough with a tape measure to be sure this number is right.
Second, you need to understand the incidentals. These are all the costs other than the base rent that might be included in your total rent. The landlord’s property taxes, insurance, and maintenance costs are examples. Landlords will typically spread these expenses across all of the units in a building, but not always. Make sure you know what incidentals you’re responsible for.
Third, you need to understand the payment schedule. Some leases have you pay the same amount each month. Others might have graduated payments that increase (or decrease) over time. You’ll often be asked for a deposit, which can typically be held until after your lease ends (rather than simply applied to the last month).
Your options before the lease ends
Leasing space is about more than your present setup. It’s important to know your rights going forward. Can you renew your lease at the same rate? Can you renew early to lock in a better rate? Do you want to be first in line to lease adjacent space in the building if your business expands? Make sure you can answer these questions before you sign.
Also consider whether you might want to, or have to, move out early. Some leases will allow for you to sublet or assign the lease (typically, with the landlord’s consent). Decide in advance whether you’d need that flexibility. On the flipside, a landlord might want to be able to terminate early if, say, they plan to redevelop. If that’s the case, see how much notice they’ll have to give you.
What happens at the end of the lease
Naturally, if you aren’t renewing, you’ll have to move out. But some tenants are surprised to find that the upgrades they installed can’t be taken with them. Custom shelves, flooring, machinery — anything you added to the unit (these are called “leasehold improvements”) typically stays put. If you want to keep these things, make sure the lease reflects that. And make sure you understand the process for getting your deposit back.
Negotiate your lease
You got this
"It was my first time leasing space, and it was a new-ish building, so I figured I wouldn’t have much success asking for a discount on the monthly sticker price. But I was able to get the landlord to pay for a small renovation I wanted to do to the boardroom. And they agreed that I could keep the furniture and shelves once we moved out. Price isn’t the only point to negotiate, it seems!"
– Alice, Victoria, BC
With the help of the above information, you now have a better grasp of what to look out for before you sign a commercial lease. Now you’re ready to roll up your sleeves and negotiate with the landlord. Here’s how to go about it.
Step 1. Know your number
It bears repeating: have a budget in mind for your monthly spend on space. The tricky part is forecasting this into the future. Remember, some leases allow for graduated payments over time, meaning you can pay less in the earlier months.
Step 2. Do your research
Look at comparable spaces in the neighborhood you’re interested in. Give a commercial real estate agent a call and ask their opinion — they often work on commissions from a landlord, so you don’t have to worry about being out of pocket.
Then look at the building itself. Does it fall short of the quality advertised? Is there any construction happening nearby that could be noisy or deter customers from coming? Are there other tenants in there that aren’t compatible with — or that compete with — your business? Consider chatting with some of the other tenants — they could provide key intel on whether it’s a good building or if the landlord is difficult to deal with.
And before you consider moving in, tune in to the neighbourhood chatter. Ask other nearby tenants whether they like it there and how foot traffic has been lately.
Step 3. Get alternatives lined up
Don’t get emotional about just one space — that’s a sure-fire way to overpay.
Step 4. Consider engaging a professional
We mentioned (in step 2) talking to a commercial real estate agent. If it’s a relatively expensive lease, spending some money on a lawyer could be a good investment. A good business lawyer won’t just look at your legal risks, they can also help negotiate with the landlord. This signals to the landlord that you should be taken seriously.
And bear this in mind: if a landlord has a lawyer, don’t trust them to have your best interests in mind.
Step 5. Negotiate on more than just price
It isn’t just about the monthly rate. You should consider whether you’d be willing to move in at the posted rate if the landlord does some renovations for you first. Or maybe you’d rather do the renovations yourself, and want to ask the landlord to pay for it (or help finance it). If a space has been vacant for awhile, you’ll be in a better negotiating position to ask for a month or two free.
Consider a competitor clause. You might not want another company that does what you do moving in down the hall and potentially enticing your customers or poaching your staff.
Finally, if a landlord wants to be able to get out of the lease before the end of the term, consider adding a penalty amount to cover your costs of having to move (or the costs of any improvements you make to the unit during your term).
These are just a few ideas. Consider getting more perspective specific to your context from a lawyer, or even a business-savvy friend or colleague.
Step 6. Decide how you’ll communicate your counteroffer
Some people are most comfortable talking face-to-face, others prefer the phone, others just want to send a counteroffer back in writing. You need to choose a negotiation medium that will give you the most confidence.