Your Commercial Lease: 3 Key Provisions You Need to Know Now

We all recognize this is a crisis unlike any other that has impacted our businesses. Never-the-less, during this or any crisis, it helps to focus your efforts where you can have an impact.

For commercial tenants, a good start is identifying three provisions of your lease that could provide improved cash flow and financial security in the near and long term.

  1. Security Deposit Reduction.

Landlords usually require a large security deposit upon lease signing. However, leases often feature an agreement to reduce the security deposit during the term of the lease. The catch? Most often you need to ask for this reduction.

We recently reviewed several leases and found such clauses. One company is now receiving $44,000 and another $36,000 in reductions. That’s a nice boost to cash flow. Also, if your security deposit exceeds 2-3 months of rent, we suggest contacting your landlord to request a reduction to this amount. The odds of a landlord agreeing are better with smaller or privately held landlords versus publicly held or larger landlords such as a REIT.

Your lease may also contain two important options. Each can be considered part of a strategy to change both the long-term financials of your lease as well as your physical space.

  1. Option to Cancel: typically requires a notice period and usually features financial penalties.
  2. Option to Downsize: may again contain a fee and notice period.

By strategically negotiating a new lease at your building (or elsewhere) with regard to your option to cancel, or an extension of your lease in combination with your option to downsize, you may be able to obtain free rent now, potentially lower your rental rate and secure a retrofit – at the landlord’s expense. That could be an upgrade and lower overhead, if done correctly.

Final thoughts: Market & Process.
It’s important HOW you proceed with any of these options. Before you reach any understanding with a landlord we recommend you reach out to legal counsel to understand the extent, if any, that such an agreement could prejudice your company’s opportunity to share in the current or any upcoming local or federal bailouts. In this environment, certain landlords will more likely reach a deal and be very accommodating to a tenant’s specific needs. Knowing who those landlords are and how to proceed is critical to your success.

By partnering with professionals experienced in negotiations during typical economic downturns, you may have a better chance to enter negotiations well-informed and well-prepared to secure lease terms that may pleasantly surprise you.