The commercial lease can be a tricky and complicated matter. Entire books are written on how to negotiate them. They are so complicated that small business owners hire agents to negotiate on their end and property management companies have their own agents in house that help to negotiate the lease for the property owner. For now, we will just discuss the different options for determining how the rent payments will evolve.
This is a simple percentage increase to the rent each year. In terms of budgeting, this is less of a hassle for the tenant because they know how much they will owe each year. This can be burdensome to the Landlord because it limit’s his income and may not account for other situational factors.
Cost of Living Adjustments
In this type of adjustment, the rent increases at the same proportional amount to an index such as the consumer price index. Tenants argue this one frequently because inflation can drastically change the rent. Sometimes a cap on the yearly percentage increase will be negotiated.
Fair Market Value
In this term, the landlord adjusts the price of rent as if they were putting it back on the market. While this is the best possible situation for the Landlord, it’s a prime target for legal battles because there is no standard way to determine fair market value. The terms for how this value is determined must be clearly designated in the terms of the lease. Otherwise the landlord might find him/herself in court, with the court freely determining the fair market value on their own terms.
Some leases will have mixed terms. An agreement could be made to have the first five years as a fixed increase and then another subsequent 5 years to have increases based on cost of living or fair market value. This can be a happy medium that encourages the renter to sign on and give the landlord comfort in negotiating a lease with a longer term. Every property and situation is different and it is highly recommended to receive advice when negotiating the terms of a commercial lease.