Maybe you are a commercial landlord who wants to ensure that you will have sufficient tenants in your buildings to cover your operational expenses over the next few years. You have seen several small businesses come and go over the last few years and worry about turnover rates affecting your profit margins.
Perhaps you run a business and need to renew a commercial lease or move your business to new facilities. There is no question that the economy seems more unstable and less predictable than it did just a few years ago.
How can you update or adapt the lease you negotiate to reflect economic instability and better protect yourself?
Acknowledge the possibility of an early lease termination
One of the biggest mistakes that people make in commercial leases is that they focus on the likelihood of the tenants staying there for the duration of the agreement. While that is certainly the ideal, it is far from what happens every time someone starts a business or expands an existing one.
New companies fail frequently, and even formerly-successful businesses may not be able to keep up with changing consumer demand. Both landlords and commercial tenants may benefit from adding clauses to a commercial lease that recognize the possibility that a business will fail.
Allowing a tenant to end their liability for rent when a new tenant takes over can lead to better communication between struggling tenants and their landlords, for example. A force majeure clause could protect a tenant from a scenario like a terrorist attack or a long-term shutdown that forces them to close their business to due to factors outside of their control. It can also pave the way for a landlord to replace them.
Revisit the lease duration or amount of rent
It’s common for commercial property to cost far more per square foot than residential properties. Commercial leases typically also last for multiple years, unlike residential leases which may only go from month to month.
Given the current instability of the economy, both landlords and tenants may see the value in renegotiating how long the lease is valid or how much the rent currently is. Shorter-term leases benefit landlords by allowing them to replace problem tenants or increase their rent when the local economy improved.
Adding appropriate protections to a commercial lease will benefit both the business trying to secure facilities and the landlord offering a place for rent.