Do not underestimate the implications of term length.
Standard Term Length
There is no such thing. Every lease brings too many considerations into the mix to make such a broad sweeping generalization. BUT… the length of your term will affect far more than most people give it credit for.
Simply put, the term of the lease is the length of time for which the tenant has the right to occupy the leased space. The term is typically set by the landlord in the lease agreement, and is usually anywhere from one year to ten years.
But don’t stop there!!!
Yes, the term of the lease is important because it determines how long you will be responsible for paying rent on the space, but it’s also important because it can affect your ability to get a loan to finance your business. For example, banks typically want to see at least a three-year lease when considering a loan for a small business. Some banks require the lease to be five years or more, so be sure to talk with your lender before going to far by yourself without this necessary information.
Beyond that, you’ll want to make sure that the term is long enough to give your business the stability it needs to grow, but not so long that you are stuck in a space that no longer meets your needs. So it’s mechanism for protection; not just the landlords!
The most important considerations in determining what length of term will meet the needs of your business include:
Will my space requirements change in the near future? If so, when does your business plan suggest this need for expansion will occur, and how much additional space will you need? Additionally, when is there a possibility that you could expand into any adjacent space on the property?
The length of your term will affect how much the landlord is willing to help you in building out your space. This help from the landlord is commonly referred to as Tenant Improvement Allowance (TIA), and it can drastically affect the total cost of your deal. TIA is discussed at length below, but for now, just know that the length of your term can determine how much you're paying for your lease space.
Landlords often will reduce the amount of base rent in exchange for longer terms. In other words, landlords want long-term, stable tenants that save them from the hassle of re-leasing the space to another tenant in a year or two. So landlords are willing to concede on how much they charge for rent in exchange or that stability (and less work on their part).
Maintaining your foothold in the area. Many tenants fail to consider that if they agree to a short-term lease, they have no right to keep leasing the space in the future. While you may think that you're winning the game by getting a one or two year lease, what you are sacrificing is the ability to control your right to the space. For instance, a landlord may be offered a long-term lease at higher rent by a competitor of yours who wants to occupy twice the amount of space you are occupying. While this may sound like a stretch, and you may trust your landlord to be kind and generous to you as an existing tenant in the event that occurs, there are just no guarantees; so use your best judgement here.
Additionally, when you move out of your space, you are essentially giving your replacement the benefit of your investment in the space. If you have installed expensive cabinets, high-end bathrooms and finishes, and a layout that a competitor would envy, you are in essence giving them money to start or relocate their business (which may attract customers and/or patients away from your business). Something to think about.
Ultimately, both the landlord and tenant must agree on a length of time that works for both parties, but knowing the main considerations that go into this decision will help guide your negotiations and ensure you understand the ramifications of term length and the impact it has on your business and future.
