Welcome back to our ongoing series dedicated to helping you avoid some of the most common commercial real estate pitfalls.
In this post, we give you four things to watch out for in order to avoid getting stuck with a bad deal on your next lease.
CLUE 1: THERE ISN’T A “RIGHT TO RENEW” IN THE LEASE
If your lease doesn’t include a Right to Renew clause, you will not be in the driver’s seat when it comes time to renew or relocate at the end of your term. Omission of this clause significantly benefits the landlord, because it gives him or her the ability to do pretty much anything they want when the lease expires — including kick you out if they have another tenant interested in the space.
If you are happy with the size, location and design of the space you’re in, be sure to have your Tenant Representative Broker (TRB) negotiate a right to renew at then-prevailing market rates and terms. Many landlords will want to continue the annual rate increases you have been paying. The problem with this is if the market happens to soften at all, you’ll be stuck with rates that are grossly over actual market.
CLUE 2: THERE ISN’T A “RIGHT TO EXPAND” IN THE LEASE
If your lease doesn’t at least give you the option to expand when and if your business outgrows the current space, you’re likely getting a bad deal.
Estimate your growth plans over the next 5-10 years, and especially through the term of your next lease. Your TRB can help you create a real estate plan in sync with your business plan and use it to make the right near-term decisions. Having the appropriate expansion language in the lease will protect you from getting stuck in a space that doesn’t work for very long.
CLUE 3: THERE IS NO CAP ON CONTROLLABLE OPERATING EXPENSES
If there isn’t a way to limit ongoing operating expense increases in your lease, you’re probably getting a bad deal.
As property values continue to rise in Metro Denver, so do taxes and other operating expenses. Landlords always pass these costs onto their tenants. The amount of some of these costs - property management fees, for example - are within the landlord’s control. Work with your TRB to add an annual cap on the amount of controllable operating expense increases your landlord can pass onto you.
CLUE 4: THERE IS A “LANDLORD’S RIGHT TO RELOCATE” CLAUSE IN THE LEASE
If your contract states that the landlord has the right to relocate you and perhaps even charge you for the associated costs, you are absolutely getting a bad deal. If this clause is in the contract, the landlord may even be able to move you at any time. Yes, it happens.
If at all possible, work with your TRB to remove any Landlord’s Right to Relocate language. This is fairly common, especially for smaller tenants, so if you must agree to include it, make sure the landlord must give you reasonable notice to relocate, and that all costs, such as relocating IT (e.g. wiring, computers, servers, phones), all the way down to reprinting your business cards and letterhead — literally, ALL the costs to move — are covered by the landlord.