Lease Terms

The length of the lease term should reflect your current needs and future plans. Try to predict your space needs one, three and five years from now, and look for a lease that gives you flexibility to move, expand or reduce your space accordingly.

Your needs today might be drastically different tomorrow. Include a lease clause that permits you to sublet or assign your lease. Also, negotiate for a clause allowing you to terminate the lease after an agreed-upon notice in writing and a payment to the landlord.

Industrial and commercial leases are for multi-year terms. If you find the perfect space, you might want a long lease to provide you with stability and security. A long lease term has other benefits, especially in a hot market. For examples:

• You know what your rent will be for the next few years, and can plan accordingly.
• It will protect you from market rent increases. When negotiating the lease, ask for caps on automatic rental increases during the lease lifespan. Under a net lease, however, you are still subject to increases in the additional monthly charges to cover rising CAM costs, property taxes and insurance.
• It will permit you to spread out renovation costs over several years. For example: The landlord makes $5,000 in improvements before your move-in. Under a one-year lease, s/he might expect the full $5,000 before the end of the lease, costing about $416 extra per month. Under a five-year lease, this cost could be stretched out over the five-year term, or approximately $83 in additional charges per month.
• In an unstable market, rent might be lower than for a shorter lease term, as the landlord will want the assurance of steady income.

Realistically, your long-term lease security is dependent upon the landlord's financial stability and interest in retaining ownership of the building. If you are hope stay in a location for a considerable length of time, find out what the landlord's long-term interest is in the property, and if s/he wants to sell.

In the event of a sale, lease terms transfer to the new owner and are up for renegotiation at the end of the lease -- as long as the property does not go into foreclosure. However, if the building is sold due to foreclosure or condemnation, the lease terms can be forfeited depending on when you started the lease. More info on evictions and lease terminations later in this section.

Although a long lease can provide stability and predictability, a shorter lease gives you flexibility should your space needs change drastically, or if the space doesn't work for you. When signing a shorter lease, include a renewal clause; try to negotiate these terms.

One solution: Negotiate for a short-term initial lease with a renewal option for a longer time period. For example, you can sign a lease for 1-2 years initially, with an option to renew the lease for an additional 3-4 years. The downside to this strategy is that the landlord might want a higher rent for the shorter lease. Also, you run the risk of a rent increase on the new contract if you haven’t negotiated the rent for the renewal term.