Seven ways to make a commercial lease more flexible for your business
Need to expand your business but are nervous about committing to a commercial lease? here are seven ways you can make it more flexible.
Predicting the future of your business is hard. And in a world where working from home (WFH) is becoming normalized, having a flexible commercial lease is of vital importance.
The worst thing a business could do is lock themselves into a long-term commercial lease without taking the necessary steps to ensure they have the flexibility they need to adjust to their future needs.
This article reveals seven ways business owners can make a commercial lease more flexible. In turn, it provides ways to create greater financial freedom and security in knowing your business can change with the world around it.
1) Identify your business’ short and long-term needs
Before you sign a lease of any length, review your short and long-term needs as a business. Are you a rapidly growing company that will likely need more space in the next year? Make sure your lease has the first right of refusal to new space.
On the other hand, if you’re a smaller business with a dwindling workforce, consider consolidating the space in your lease in favor of lower lease payments.
2) Choose a shorter-term lease agreement
Committing yourself to a long-term lease may be detrimental in today’s fast-moving enterprise world. To combat this problem, consider signing a shorter-term lease with your landlord or leasing agent.
Shorter-term leases usually cost more as landlords incentivize longer-term tenants. But what you give up in cost savings you gain in the freedom to control where you move and when you move.
This is a tricky situation to maneuver. You want to get the shortest lease possible while at the same time providing your landlord with an adequate level of security they desire in a tenant.
3) Retain your right to sublet and assign
Subletting and assignment are two ways to provide flexibility in your lease agreement. When you sublet your office space, you’re allowing other parties to rent that space to you.
This means you can shrink your team and keep your office while having another company pay for the space you don’t need. This makes sense for larger companies that have the budget to lease more-than-enough space.
Confirm that you can sublet the space before you do it. That way you don’t run into any leasing violations with the landlord. Let’s move to Assignment.
An Assignment allows the current tenant to transfer 100% of their remaining lease obligations to another potential tenant. This allows the tenant to walk away from the lease should they find a suitable replacement.
Assignments are great options for companies wanting added flexibility to their lease. For example, Assignment lets you transfer the lease to another company should you be forced to relocate or terminate the office space.
4) Set a time to renegotiate
I know it sounds weird. Why set a time at the beginning of a lease to renegotiate the original lease? Scheduling dedicated time to renegotiating a lease shows the landlord that you’re intent on keeping things flexible. It also allows you to set the standard for how you want to structure the next lease contract.
Most lease agreements have renegotiation clauses built-in. Ensure that your lease contract has that before signing.
5) Add expansion and contraction clauses
As we noted above, having the ability to expand and contract as your team grows or shrinks is important. If you can’t do this through subletting empty space, consider Expansion and Contraction clauses.
As the name suggests, these clauses allow you to expand and contract your space when needed. This means when your team grows, you have the freedom to take more space in the existing office. Or when business slows and you have to reduce production, contraction clauses save you money by paying for what you use.
6) Be cautious about personal guarantees
Personal guarantees lock you into a lease beyond whether your business fails or succeeds. This is important because personal guarantees might lock you into the lease even if you want to leave before it ends.
The issue is most landlords want some sort of personal guarantee before signing the lease. You’ll have to negotiate hard to get out of a personal guarantee, but it’s worth the try.
7) Secure the right to terminate your lease early
Securing the right to terminate a lease early is as valuable (if not more) than securing the right to expand or contract your space.
While tenants can sublet their unused space, nothing will save you more money than the right to terminate a lease earlier than its contract date.
A popular way to structure flexibility into a long-term lease is to create early termination clauses.
In most cases, the tenant will pay a fee for terminating their lease early, but the cost you pay is well worth the financial flexibility.
If you don’t ask, you won’t get
These seven steps improve your business security and flexibility and could provide much-needed financial freedom in the event your business transfers or shuts down.
The biggest factor in all these steps is that if you don’t ask you’ll never get it. Ensure that you negotiate each of these steps into your commercial lease agreement.
Photo by Jan Gottweiss
