When signing a commercial lease, it’s important to consider the lease length.
When you’re ready to lease commercial space, and you find exactly what you’ve wished for, you may want to hurry to sign on the dotted line. But not so fast! Before you get out the pen, you’ll want to carefully consider the length of the lease term. After all, signing a lease is a major commitment, so you want to make sure your interests are protected. Get locked into a lengthy lease term, and you could be stuck in a space that doesn’t grow to meet your business needs. Too short, and you may miss out on some potential perks of signing a longer lease. The considerations are many.
So how long should your commercial space lease term be? Here’s some food for thought.
Benefits and drawbacks of short-term leases
A short term lease might be for just one to three years, and most landlords shy away from leases that are short. If you expect your organization to grow substantially in the next few years, or if the market is volatile and you may need to scale back, a shorter lease may offer the flexibility you need to move when you expand beyond the commercial property you’ve leased or no longer need so much space. More, if your needs are likely to change swiftly, as is often the case with startup companies, a shorter lease may serve you well. And if you don’t need to customize the space much at all, a shorter term lease may be great for you.
On the other hand, if you need to customize the new space, you may not even be able to find a landlord who will agree to a short-term lease. And keep in mind if you sign a short-term lease, you’ll need to embark on that time-consuming and often costly process of finding a new space, moving and setting up operations faster that you may want to. It’s also important to note that short-term leases often don’t provide any leverage for you to negotiate on either the lease price, improvement allowances or other options landlords might be open to with a long-term lease.
Standard term leases, pros and cons
If the lease in question spans three to five years, it’s a standard-term lease, and it may provide the flexibility you need for your business as well as some stability. More, if you opt for a standard-term lease you may be eligible for some of the bonuses that landlords provide to longer term tenants, like a couple free months of rent, improvement allowances or other points of negotiation. Lease expenses will be more predictable for you, too, as you’ll be staying in the space longer. And you might enjoy the stability that comes with not having to pick up and move shop in a couple of short years.
On the other hand, as a tenant with a standard-term lease, you will not enjoy the flexibility that comes with a short-term lease — so scaling up or down is not as easy. If you are working with a landlord who has several commercial spaces, however, you may be able to negotiate for another office space that better meets your needs, particularly if you require a larger space.
The good and bad of long-term leases
Long-term leases often provide the least amount of flexibility, with a tenant typically locked in for five years or more. You will have greater negotiating power when it comes to pressing for concessions, improvement allowances, expanded sublease options and exclusivity rights. You’ll also likely find it’s easier to project your budget for the foreseeable future.
On the possible downside, negotiations for longer term leases can actually take longer and be far more complex. More, it goes without saying that you’ll be making a sizeable financial commitment — and that comes with risk if you are just starting your business or in a volatile industry. And if you quickly outgrow the space, you may find yourself stuck. It’s important to consider the potential for negotiating an out if the landlord has another space open up that would meet your needs.
The appropriate lease term: a vital consideration
Finding the right commercial property for your business is really just the beginning. Settling on an appropriate lease term depending on your business trajectory is key to ensuring that a space works for you rather than against your business goals. When it’s time to sign, settling on a short-, standard- or long-term lease is a major consideration for the future of your business.