What is an escalation clause?

What is an escalation clause?

| Nov 12, 2020 | Uncategorized |

When scouting for new business premises to lease, you may find the terms used in the rental contract somewhat confusing. Misunderstanding them could leave you open to unexpected costs.

One thing many business owners miss when signing leases are escalation clauses. These allow a landlord to increase your rent in the future.

There are valid reasons for escalation clauses. They protect commercial property owners from losing money or potential profit when signing long-term leases. Property values in an area may increase. A landlord would feel aggrieved if tied into a contract where they receive only half of what they could. Costs can go up too. If you sign a full-service contract, the property owner needs to cover increased wages for staff such as cleaners, security and reception, if the minimum wage rises.

If your company consists solely of people working on laptops, a long-term lease may be less important. However, if you own a restaurant or other business that relies on customers knowing where you are, consistency of location is everything. Fitting out a place also takes time and money.

Before signing a long-term lease that includes an escalation clause, you need to ensure it is not overly advantageous to the landlord. If you can determine a fixed increase, it allows you to plan your finances. However, many landlords prefer variable escalation. Try to limit the frequency and percentage increase allowed and tie it to something, such as inflation, rather than being at the landlord’s whim.

Tying your business into an unfavorable lease contract could be an error that is hard to escape and difficult to recover from. Before signing a commercial lease, have the contract checked by an experienced attorney.