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How to Negotiate the Best Terms in a Commercial Lease Agreement in Texas
A commercial lease agreement refers to a contract that defines the rights and the responsibilities of a commercial property landlord and the tenant. It gives the tenant the right to temporarily (the duration agreed upon in the lease) use the premises for business and at a specific monthly rental rate. Being an agreement, it means that you have the right to negotiate for favorable terms. As a startup trying to fledge your wings, you don’t want the expensive rent and property leasing expenses to clip your wings off. And being the biggest business expense, you should review all the terms of the lease and find ways of making that lease work for you. Even at a prime location that may fly off the market fast, it’s worth making an effort to negotiate for terms that will encourage business growth.
First, most, if not all the terms of the commercial lease agreement in Texas and all other states always favor the landlord (lessor), and you need little effort to negotiate for significant improvements to those terms of the lease. For example, it’s not written in stone that you should sign a triple net lease that forces you to pay the monthly base rent in addition to the cost of property taxes, insurance premiums, and common area maintenance costs, repairs and other related costs.
Note, however, that while all the terms of the lease are negotiable, your negotiating power depends on the state of the local rental market. With plenty of commercial space, you can easily win several concessions. But, if you are looking for space in a tight market, you’ll have little leverage, and you can only negotiate so much.
So, what can you negotiate?
If you are only starting, you may want to negotiate for a short-term lease. Should your needs change, the short-term lease gives you flexibility not afforded with long-term leases? The short-term lease is also favorable if you have to close shop or expand to a bigger space and the landlord does not allow subleases and assignment.
But, if you have an established business, then a long-term lease may be an affordable option. Also, the landlord is likely to make more concessions when you choose a long-term lease.
Given the uncertainty around businesses, given the unstable political and economic ecosystems, you may want to negotiate a short-term lease with an option to renew. This is called a periodic lease, and it’s favorable for most businesses. The other option is the fixed term lease, but it lacks the option to renew.
Rent, Expenses, and Rent Increase
When signing a Texas commercial lease agreement, you’ll have agreed to pay an X amount in rent monthly. But, is that the fairest deal you landed? First, before considering one lease, compare the rates for comparable spaces. And if the rent is ridiculously high, ask for a reduction. This is, however, a long shot with most landlords refusing to lower the rent except for poor economic times. What you can do instead is to ask for a few months where you can run your business at a reduced rent so that you can compensate the moving costs and other costs.
This also means that you should find the most favorable type of lease with respect to the rent payable. As mentioned above, a triple net lease means you will be shouldering all the costs related to the commercial space. You may want to discuss who caters for repairs and maintenance as you consider the gross lease (confirm that you will only pay the monthly rent) or the modified gross lease (base rent and a portion of the property expenses).
Also, on rent is rent increases. Landlords are allowed to increase the rent they charge annually to cover the effects and costs of inflation. These costs are called escalations. If your landlord insists that the escalation costs should be included, ask for or get a cap on the rent increase rate or amount.
Subleases and Assignment
If this is not in the lease, ask the landlord for the right to sublease and assign the space should you sell your business, close shop for other reasons, or move to a bigger space. Subleases and assignment mean that the third party will take over the lease and do everything you did, and you don’t have to break the lease.
If you are signing a long-term lease on a space that requires a lot of improvements, ask for a tenant improvement allowance. And even with a short-term lease, you could use the state of the space to negotiate fair deals.
Improvements for ADA compliance
Before signing a lease, confirm that the space is ADA compliant and accessible to persons with disabilities on the interiors and exteriors. In the lease, name the party responsible for space improvements for ADA compliance. The ADA expects landlords and tenants to make their places of business accessible.
To get started with business or commercial property leases in Dallas, Houston, Austin, El Paso, San Antonio, Fort Worth, Waco or any other city in Texas, download our free commercial lease agreement forms here.