How Long Should My Commercial Lease Be?

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As a startup or small business owner, you might be looking for a space for you and your team to work.

But, how long should the duration of your lease be?

Landlords often prefer their tenants to sign long-term leases as it provides more financial security for them.

Depending on your commercial situation, you need to consider whether the term proposed by the landlord is the best option for you.

As a small business or startup owner, there are uncertainties when it comes to the future of your company. Being tied up in a long-term lease might not offer you the flexibility that you need.

So, what are the things to consider when deciding the length of your commercial lease?

What Is A Commercial Lease Agreement?

Before jumping into the terms of your lease it is important to know what type of lease you are getting yourself into.

Simply put, a commercial lease is a contract between a landlord and a business who is renting the landlord’s commercial property.

Commercial properties can be office spaces, warehouses, storage spaces … basically anything that is not residential.

Commercial leases can be quite complicated because you need to negotiate to get the best deal.

Not having an informed knowledge of commercial leases might have you agreeing to terms that are bad for business.

Things To Consider Before You Sign A Lease…

Before signing your commercial lease, it’s important that you review it thoroughly.

1. Actually Go And See The Property

This may seem like common sense, but you’ll be surprised at the number of business owners who look at pictures online and think this is enough “inspecting” before signing the lease.

You should definitely check out the space for yourself and be assured that this is the right decision for you and your company.

2. Do Some Research About Market Rent

After inspecting the space, you will have a good idea as to whether the rent you are going to pay is appropriate.

If you’re new to the commercial lease game, talk to people who are knowledgeable about what’s ‘market’, and what’s not.

This will provide you with the opportunity to negotiate prices and set cost parameters from the start.

By doing this, you will avoid any unmanageable rent increases and extra costs.

3. Read The Lease Contract!

The lease contract will contain all the clauses setting out the agreement between you and the landlord.

Responsibilities like maintenance and repair, improvements and modifications to the space, as well as termination requirements and extra costs, will be covered in the lease contract.

One of the most important things to note is the length of the lease.

It is crucial to really think this through because you’ll be legally bound to the lease for the agreed length of time.

So, what should you think about when setting a length for your commercial lease?

Long-Term Or Short-Term?

Depending on the goals you have set for your business, you need to consider whether a long-term or short-term lease is the best option.

The main benefit of signing a short-term lease is flexibility when it comes to the growth and needs of your business, especially if you’re not sure how things will progress.

There is less financial risk involved with short-term leases as your business won’t need to carry on with the payments of a long-term lease.

If you’re unsure about the future success of your business, a short-term lease may be an option for you.

But, one major disadvantage of short-term leases is the lack of long-term stability.

If there is no option to renew, you might find yourself having to renegotiate frequently or be forced to move locations. This might prevent you from building a solid presence in the market.

A long-term lease might be an option to consider if your business already has a stable foundation.

A long-term lease provides you with the opportunity to build a reputation and establish a fixed presence in the market, without having to think about unexpected rental terms.

Also, a long-term lease allows you to plan the future because you will know the terms of the lease and they are unlikely to be affected if the owners change.

Basically, it’s a balancing act between certainty and flexibility – and what’s best for you will depend on your business’ plans.

What Are Commercial Lease Options?

Whether your lease is short-term or long-term, there’ll usually be a discussion around options.

A lease option will let you decide whether you want to renew the lease before it ends, usually on the same terms as the original lease.

Options are good for tenants because you get the choice of securing the same terms, without having to commit to them.

If this is important to you commercially, make sure the lease contract contains an option clause that you’re expecting.

With some negotiation with your landlord, it’s quite easy to include an option clause into your lease and will save you any hassles about renewing it in the future.

One thing to make sure of is that you properly exercise the options within the required period. This is known as the option exercise period and will be set out in the lease contract – typically starting 9 months before the lease term ends, and finishing 3 months before the lease term ends.

If you manage to get an option, make sure you don’t miss the cut off date!

Have You Considered Co-working?

If you think that your business is not ready for its own working space, there are many shared office spaces which might be the right fit for your business.

For example, we at Sprintlaw lease a private office at The Commons, and it’s great! We get a flexible monthly membership at a fraction of the cost of a normal commercial office.

There are plenty of similar co-working spaces around, so you should be able to find a space that is convenient for you.

It’s also good because these spaces already have facilities that many businesses and startups need.

Desk areas, meeting areas, printing and copying etc. are all included in the space, so you don’t need to pay extra to fit out these things in your own working area. Not to mention the social events and wellness programs!

Co-working is a great alternative if you don’t have the finances to have your own space.

Instead of having a lease agreement, co-working spaces tend to have “desk licensing agreements”.

It’s a more simple contract which allows you to use their facilities under certain conditions for an agreed period of time.

If the short term lease option is not flexible enough for you, a co-working space is definitely something to consider.

What To Take Away…

Choosing the length of the commercial lease for your business depends on the plans you have for its future.

As the owner of a small business or startup, these initial decisions for your company are crucial to its success.

Whether it be a long-term or short-term lease, each have their advantages which may be best-suited for the growth of your company.

It can be quite a difficult decision to make and it is important to know what terms to negotiate before entering into a lease with your landlord.

If you need guidance on how to determine the length of your commercial lease or on what terms you should negotiate, don’t hesitate to contact us. We are here to help!

Esha Kumar

Esha is a law graduate at Sprintlaw from the University of Sydney. She has gained experience in public relations, boutique law firms and different roles at Sprintlaw to channel her passion for helping businesses get their legals sorted.

Tomoyuki Hachigo

Tomo is the co-founder of Sprintlaw and a commercial lawyer with a broad range of legal experience. Before starting Sprintlaw, he was an M&A lawyer at a top-tier law firm advising businesses of all sizes from large corporates to startups.