Lease length, indexation and rental guarantee
The length of the lease is one of the most important elements influencing the tenant's rental conditions. Please consider for how long you would need the space.
The longer the lease, the more valuable it is for the owner/landlord. As long as tenant’s business is doing well, it provides the long-term security for the property owner. At the same time the landlord cares about tenant’s stability – it is therefore in his best interest to work with a tenant to create a manageable lease, both in terms the content and length.
Long term tenants mean also less work for the landlord. They are also more economical because the landlord doesn’t have to find new renters every year/spend money on advertising and leasing.
Businesses, however, generally prefer shorter term leases, as they can benefit from more flexibility. In case you are interested in shorter lease, sometimes you can benefit from the sub-lease terms on a long-term lease. However, the sublease may have the limitations, as you are a subtenant of the main tenant who has a direct lease with the landlord. A short-term lease can also expose you to sizable rent increases when the lease is up, depending on market.
To strike the best balance, you can negotiate additional clauses allowing you: to take on additional space in the building once it becomes free (right of first refusal) or go out of the lease earlier (lease break clause), if you cannot fit anymore in the current premises, fix up-front the renewal options or set a cap on the amount of annual rent increases.
Align your lease with your business finances - see how your business will grow in the future. Last thing you want to do is to sign a long-term lease on a huge space when your business is just starting up and you don’t yet know what profits to expect.
On the other hand, you don’t want to sign a small business lease for a just-big-enough space if your company is rapidly growing.
You need the right size space for the right amount of time!
In Switzerland the standard lease length the landlords will insist on is 5 years, as only minimum 5 years leases can be indexed by the landlord. Indexation insures that the rental value will follow the movement (usually upward) of the consumer price index and hedge landlord’s risk against inflation. Fast growing small company that would like more flexibility can try to negotiate a 5 years lease with a break option after year 3. This will give the landlord his indexation, and the flexibility to the small business.
It is always good to be able to have an additional flexibility in the lease. In case you are growing rapidly and have no idea if your premises size will suffice, or your business is winding down and you can see the stepped closure… You can sign a long-term lease and secure the possibilities to go out of the lease earlier, in the form of the early break options. Such possibilities may also cost you money - usually in form of the penalties to be paid in case you use such early break. However, if your company really needs to use the break, the penalty would always be lower than the cost associated with carrying on the full-blown activities over the years.
Another factor that has an influence on you lease length is if you as a tenant are contributing to renovating the space. Depending on how much money you invest in the premises you may want a longer lease term so you can amortize the money spent on the fit-out and equipment.
Align your lease with your company’s finances
Try to foresee how your business will develop in the future. The last thing you should do is sign a long term lease for a large space when your business is just getting started and you can't predict its future. On the other hand, you don't want to sign a lease for space that doesn't allow your business to grow either. What you need, it's a right size office, for the right amount of time.
Another factor you need to consider that may affect the length of your lease is whether contributed/paid for the renovation of the space. If yes, you may want to sign for the longer lease term in order to amortize the money invested.
Lease length in Switzerland
In Switzerland the standard lease length the landlords will insist on is 5 years, as only minimum 5 years leases can be indexed by the landlord. Indexation insures that the rental value will follow the movement (usually upward) of the consumer price index and hedge landlord’s risk against inflation. The compromise could be a signature of 5 years lease (hence indexed) with an early break option at the end of year 3.
Majority of the commercial leases is indexed. In Switzerland only the leases of at least five years can be indexed to the Consumer Price Index.
Make sure your lease mentions exactly the index of the reference and modalities of indexation (usually once a year). Very often Landlords agree to the only upwards indexation. Alternatively, the parties can agree to the fixed indexation. Some business may want to befit from shorter lease. For example, if you foresee the growth or reduction in your headcount you may be willing to have an opportunity to get out of your lease before the lease term.
Staggered rent is possible for a lease term of at least 3 years. However, staggered rent cannot be combined with indexed rent.
The covenant of the Tenant will dictate whether the landlord will require any security for the tenant’s compliance with the obligations under the signed lease. The landlord is likely to require some form of security, most commonly a rent deposit, a third-party guarantee, or a bank guarantee. The security deposit protects the landlord if you fail to pay rent or violate the lease. The security deposit is refundable, but the landlord will hold the deposit on your behalf during the term of the lease
It usually amounts to 3-6 months of rent and charges but may also be more in case tenant is a start up or does not have a previous business record. In Switzerland there are the institutions like e.g. SwissCaution/Firstcaution who can, upon verification issue the guarantee without deposit. At the end of the lease term, the landlord should refund the security deposit if you leave the space in the condition required by the lease, and do not owe the landlord any money under the lease
If you are in the process of renewing your lease and think your rental guarantee is too high, you can try reducing when renewing. You can ask your landlord to reduce your rental guarantee, referring to being an exemplary tenant in recent years, who has always paid over time.