Whether it’s your first lease or your tenth, taking on a new space for your studio is just as exciting as moving into a new home, and it’s worth celebrating the milestone. But before you pop the Champagne, it’s imperative that you first read your commercial lease from start to finish, and then make sure you understand every word in there. Unlike residential rentals, commercial leases can be hundreds of pages long and contain many hidden clauses that behoove the landlord—not you, the renter. The key thing to remember when looking over your lease is that landlords are always aiming to push any risk off themselves and onto the renter. We recommend hiring a real estate lawyer to help you through the negotiation process, and to ensure your business is protected.
There are two types of commercial leases, short-term or long-term. A shorter time period means that your lease is easier to get out of if your business can’t support the space, or if you’re growing so fast you want a different, bigger studio. Not surprisingly, landlords prefer long-term leases as they know they’re locking in a tenant for multiple years—but because of that, they are also more likely to make concessions (see below) when it comes to negotiating.
Key to the lease term is adding in an option to renew your lease for a similar price down the road. “Make sure to have an option for renewal so landlord can’t increase rent after a few years,” advises Larry Track, owner of Track Fitness in Toronto. “For example, sign a five-year lease, plus a five-year renewal option. That way you’re keeping your options open.”
You can expect a higher rent (within reason) if you choose to renew, and there is the potential for a renewal fee as well. If the space is key to your business’ success—let’s not underestimate the importance of foot traffic for any fitness studio—then both the rent increase and the fee are likely worthwhile.
ROOM FOR IMPROVEMENT
Commercial leases are chock full of fees and risk, and it’s crucial that you whittle down these prices, or put a percentage cap on them, in advance. Your city’s real estate market will have a big role in how much your landlord is willing to negotiate. “When negotiating, be willing to walk away from the deal to get your best price,” says Track. “If you’re not willing to walk away, you’ll be in the hands of the landlord and the deal they want. Never take the first offer unless you’re in a bidding war for the space.”
Your lease is based on two things—usable area (i.e. the actual studio space) and rentable area (hallways, common spaces, loading docks, etc.). If you’re not planning on using the loading docks or the elevators if you’re on the ground floor, for example, this is something you’d want to negotiate down.
If the space needs improvements before you can move in—like, paint, drywall or improved plumbing—you want the landlord to pay. A long-term lease will provide incentive for him to do so.
There are also the operating expenses to consider. These fees—covering taxes, utilities, maintenance, landscaping, janitorial and repairs—are either included in your gross lease, or you’re required to pay for them separately. Make sure you find what’s exactly included under your lease’s operating expenses, and then try to negotiate out of whatever isn’t relevant to your business.
DO YOUR HOMEWORK
To increase your negotiation leverage, check out comparable spaces nearby. What are they charging by the square foot? What fees are built into those spaces’ leases? What are their renewal terms? Are any of the spaces offering a free month or months to long-term lessees? Having this information at your fingertips will be a powerful tool when negotiating with your landlord.
Another task you need to take on prior to signing the lease is actually measuring the space yourself. Commercial leases are mostly priced by the square foot, and oftentimes those measurements are way off—either grandfathered in from previous leases or stats prior to major renovations. Confirming the space’s size yourself could save you thousands of dollars in the long run.
“Make sure the landlord is very aware of your plan,” adds Melissa Boyd, owner of Salt is the Cure, a high-intensity barre studio in San Francisco. “Are you going to be playing loud music? What are your operating hours, your power needs, will you use loud equipment, etc. Also be sure to get detailed reports on the property, especially regarding roofing, pipes and lead.”
READ THE FINE PRINT
The length and verbosity of a commercial lease can make pouring over every detail difficult—but if you don’t do so, you’re exposing your business to exorbitant fees in the long run. For example, you need to pay extra attention to who is responsible for damages: the landlord or the renter. Say one of your students drives into a fire hydrant and floods the property, who is responsible for this? The cost to repair and clean up after an incident like this could bankrupt your business.
If you’re signing a long-term lease, there is likely an escalation clause in there, where the landlord raises your rent to pay for increased building costs. While this is a valid clause, you want to be sure to put a cap on the amount it can increase year to year. (Experts suggest no more than 5 percent of total rent annually.)
You’ll also want to insist upon a co-tenancy clause if there is an anchor tenant in your building. This clause allows you break your lease if the anchor tenant—which presumably drives business in the form of foot traffic to you—leaves the premises. Basically, if Whole Foods closes and stays empty for two years, you want the option to get out of there as well.
For the sake of your business’ viability, you also want to insert a clause that doesn’t permit the landlord to rent any other units on premise to a similar business. Because two cycling studios or boxing gyms in one building isn’t good for anyone.
Lastly, pay special attention to the sublease or assignment clauses—and if they don’t exist, add them in. This covers you in the event your business goes south, by allowing you to sublease the space to a new tenant without having to actually break your lease.
Are you a ClassPass Studio or Gym partner and looking to expand? Email our Partner Success team at email@example.com to learn more about how we can help.