When you’re negotiating (or signing) a commercial lease, it’s extremely important to read every single line of the contract as carefully as possible.
One item to which you need to pay particular attention is the rent escalation clause (because there’s bound to be one).
What’s a rent escalation clause?
Essentially, this allows your landlord to raise the rent. This is a normal part of business, as commercial property tends to increase in value over time and landlords want to protect their investments.
You also want to protect your investment, so here are the basic types of escalation clauses you need to recognize:
- Indexed escalation. These common escalation clauses are tied directly to the Consumer Price Index (CPI). If it goes up, so will your rent — and that can be a steep shift that can be hard to manage.
- Tax pass-through escalation. With this clause, your rent only goes up if the property’s taxes rise during your lease. You’ll usually pay only a percentage based on your occupancy.
- Direct operating cost pass-through escalation. If your landlord’s utility, maintenance and security costs rise, so will your rent. While this is reasonable, be sure you know how “operating costs” are defined.
- Stepped increase escalation. This is an automatic, periodic increase that occurs at a set rate. These are often the most tenant-friendly because you know exactly what to expect as the years roll by.
Signing that commercial lease is a big deal. A good lease is critical to your company’s future. If there’s anything you don’t recognize in the final draft of your lease or don’t understand, stop and call an attorney right away. Even better: Let an experienced advocate guide you from the very start of your negotiations.