At first glance, determining the length of your office lease seems like a simple enough process. There are long term leases and leases which are short term, with both options having advantages and disadvantages. Sometimes shorter leases are best, while other times it is better to get a long term option. When searching for office space for lease in Toronto, it is important to develop the right strategy.
Consider the State of the Market
When market conditions are bad, such as during a recession, many landlords will be content just to find tenants who will pay their rent on time. As a consequence, they will be very flexible when it comes to lease terms. However, once market conditions become better, and vacancies are lower, landlords will be less open to making deals. They will be selective about who they allow to become tenants and under what terms. As a buyer, the best time to sign a new lease is during an economic downturn. By locking in a five or ten year lease you can enjoy significant advantages once the market turns around.
Consider the Building Improvements
Many office buildings will need varying degrees of maintenance. The landlord may want to price out these improvements, especially if they are extensive, and in return they will want a longer lease so that they get the funds needed to handle the expenses. This is a reasonable request, as the owner wants to reduce their risk and their business decision is sound. Additionally, the landlord will assume most of the risk, as they will perform the maintenance up front with the expectation that you stay in business for the duration of the lease. If you don’t, this will hurt them a great deal.
When to Choose a Short Term Lease
Short term leases are recommended in situations where the company is just getting off its feet and you’re not sure about its future. It is also a good option after an acquisition, as you may not need the space for long. Companies that perform acquisitions regularly will need office space that can accommodate their growth, so this is another important factor to consider. A short term lease is advantageous because it gives you time to gauge the firm’s performance before you transition into a long term lease.
Longer Leases Make You Eligible for More Concessions
One advantage of a long term lease is that it makes you eligible for more concessions. Smart landlords will provide perks such as regular improvements combined with a discount for the face rent. While reducing the face rent will lower the value of the building offering tenant improvements will make up for it. The best landlords are those who are flexible in regards to your growth. Be sure to take advantage of any concessions you can, especially while the market favors the buyer.
Always Insist on the Right to Sublease
When signing an office lease, especially one that is long term, it is critically important to make sure there is a clause in the contract that allows you to sublease. The reason this clause is so important is because as a tenant you could find yourself in a situation where you need to dispose of the lease sooner than desired. When you have the rights to sublease you have the ability to cover some of your costs through a subtenant. Another clause you should consider is the right to terminate.
For instance, you could sign a 7 year lease that gives you the right to terminate after 5 years. In this situation most landlords will want tenants to pay for things such as legal fees, unamortized TIs and architectural costs. While the final termination fee can be substantial it provides you with flexibility while giving the landlord the ability to get a return on their investment.
Don’t be Afraid to Negotiate
A lease, whether it is short or long term, is a serious matter. Once you sign the contract you are locked in whether your business makes sufficient profit or not. Every businessperson knows that markets have ups and downs, good years and bad years. During the bad years you will be expected to continue paying the same rent as during the good years, so if your business doesn’t bring in sufficient profit for an extended period of time you could find yourself underwater.
This should always be factored into deciding how long your lease will be, and you shouldn’t be afraid to ask for any terms that you feel are reasonable. The best deals are those which are market based. When you sign a lease with a landlord you should expect to work with them for the long term. But you should also consider recessions, stagflation and economic slowdowns which will inevitably arrive and impact your profits.