What to Consider in a Commercial Lease

What to Consider in a Commercial Lease

Commercial leases are often more complex than a simple residential lease, so it’s even more important that you understand what you are signing and why. As one of the top expenses in a business, your rent carries a lot more weight than simply where you are located.

If a landlord says, “It’s our STANDARD lease. Everyone signs it…” STOP! “Standard” does not mean fair to all. Essentially, a lease is a partnership agreement in that it sets out the parameters of a business relationship. If a lease has not been carefully drafted, small misunderstandings and assumptions can become major problems for one of both parties. Though there is no “standard” format for a commercial lease, most will (and should) cover the following elements in order to provide clarity and security for both you and the landlord:

15 Things to Look for in Your Lease:

  1. Length of time. Leases can range from a short-term, seasonal stay, to a long-term lease lasting years and years. Regardless of the length, your lease needs to specify the exact start and end date, as well as the last day to seek an extension to your lease, if you want it. Renewal terms can often be negotiated and renegotiated, but you’ll want a good guideline written out from the start.
  2. Rate specifications. A commercial lease must specify how much the rent costs and what expenses (such as utilities, taxes, etc) are included. Depending on what type of lease you have (we’ll get to that), some landlords include taxes and insurance, while others do not. Before signing a lease, make sure you are getting a true picture of what you are required to pay—don’t be afraid to ask for an itemized breakdown of expenses.
  3. Who takes care of what? If your space requires repairs, who pays for them and to what extent? Is there a difference between indoor maintenance and exterior maintenance? Who is responsible for the AC unit or the roof and for how long? How will these expenses be allocated for future repair needs? Double check that your lease specifies whether you are taking the property “As-Is” or if you are performing Tenant Improvement (TI) of any kind. Are you paying electric separately, or on a percentage, or did you sign a Full-Service Gross (FSG) lease? This is SO important when making your business budget!!
  4. Business protections. No one wants a contingency plan with a new business, but you should have one. Are there provisions for subleasing or conditions for defaulting on your lease? Help protect your business by answering these questions sooner rather than later.
  5. Set a cap. While, at first glance, your rent is your rent, be advised that many (maybe even most) commercial leases include a percentage increase clause, which means your rent will increase annually…yuck! Double check for extra costs like rent increases, or extra use of utilities, etc. You should also ask your landlord how they intend to deal with property tax increases. Ask your landlord if they can limit (or exclude) the amount of property taxes that are passed on to you. You’d be surprised how some landlords are okay with this, but don’t be surprised if they aren’t. It’s just good to clarify.
  6. Check your measurements. If you are paying $1,000/mo, what is that covering? Are common areas such as lobbies, parking stalls, and bathrooms included? Definitely ask how your space is measured and get an EXACT measurement, especially if you are responsible for Common Area Maintenance fees (also known as CAM fees). CAM fees are determined by dividing the square footage of the tenant (you) by the total square footage of the building or space. Is your space measured by usable space, or gross square footage? It’s weird to think about, but can mean a lot to your bottom line.
  7. Change will do you good. Most landlords expect you to change their space in some capacity, but it’s important that you discuss it before you cut a hole in the wall or slap paint on brick. Your lease should specify what changes can be made and whether or not the space must be returned to its original condition upon completion of the lease. Pay close attention to furniture, fixtures, and repairs.
  8. Read the fine print. Read the fine print on your exit strategy. If you sell the business, can you transfer the lease to the new owner? Can you sublet all or part of the space to another business? How will the commercial lease agreement be terminated if the landlord wishes to break the lease? What kind of notification will you be given and what penalties should you expect? Are there additional rules you need to follow within a shopping or business center? What happens if large-scale renovations are planned? How will your business be compensated for a forced closure for upgrades? Will the landlord relocate your business to another space within the same building and what are those terms, etc?
  9. Cover your Assets. Unless you have agreed to personally guarantee the lease, make sure any sections of your lease that mention a guarantor are stricken out. Sometimes landlords will forget you didn’t agree to this and if your name is included on the lease and your company is unable to pay the rent, then the landlord will be able to come after you personally.
  10. Security deposits. Yes, you will have to pay a security deposit, but make sure to ask for a specific length of time to get your security deposit back. The sooner the better. Standard is anywhere from 30-90 days after vacating a space, but negotiate this with your landlord before you sign over a check. Determine what can and cannot be deducted from your security deposit and set expectations for the conditions of its return.
  11. Use. Ok, so this seems obvious, but make sure you note, specifically, what you intend to do or sell in the space. You want it in writing that you are allowed to do XYZ. The last thing you want is to go to court over your daycare business because the landlord decides, after the fact, that they only want retail stores in that space. Do not commit to a lease where you are not 100% guaranteed to be able to run the business you want, the way you want.
  12. Here’s your sign. Make sure that you negotiate signage with your landlord. Did you landlord agree to pay for lobby signage or exterior signs? Are there any restrictions relating to size, location, lighting, or general appearance? Make sure you list it within your lease agreement.
  13. Dispute resolution. Pay close attention to what your lease says about dispute resolution. If you’ve never paid legal fees, consider yourself lucky, but litigation costs can quickly get out of control if you aren’t prepared. Is litigation necessary or is mediation or arbitration an alternative?
  14. Compliance laws. Commercial spaces must comply with a large number of federal and state laws such as Americans with Disabilities Act (ADA) and occupancy permits. Typically, a landlord is responsible for ensuring the space is compliant with the laws, but it is important to understand who will pay for modifications if necessary.
  15. Ancillary terms. Even if you like them, your landlords are NOT your friends. This is business, so don’t trust that everyone is looking out for your best interests. Rent is only one part of a commercial lease. Maintenance costs, improvement reductions, unexpected repairs, rent hikes, and more can cost you hundreds and even thousands of unanticipated dollars. Think like a layer (or hire one) to make sure you don’t get slapped with a shocking end-of-month bill.

Types of Commercial Leases

See, I told you we would get here. There are a number of different types of commercial leases that you as an owner and entrepreneur need to consider when choosing a rental space. Understanding the basic terminology of a lease can help you determine what will work for your business short and long-term. Common lease-types include:

  • Single Net: Tenant pays for rent and property tax
  • Double Net: Tenant pays for rent, property tax, and insurance
  • Triple Net: Tenant pays for rent, property tax, insurance, and property maintenance costs
  • Full-Service: Sometimes called a Gross Lease. Tenant pays rent and the landlord covers all the other costs. This is the most common commercial lease and provides the greatest protections to tenants.
  • Percentage: Tenant pays a pre-determined amount of base rent each month plus a percentage of monthly sales.

Before You Sign

Choosing a commercial space isn’t always just a matter of location. Before you make a final decision, follow these final steps:

Understand your needs

Now is not the time to think big. Consider carefully how much space you need and whether the space you are exploring will allow for growth (or will swallow you up).

Research the market

Obviously, you should compare rates from space to space, but also take a hard look at what the market is allowing in your business. Really, and I mean really, look at your space.

Is this the right location? Who are your competitors? What is foot traffic like? How is it when you drive the area? How is parking? Does your building have the infrastructure you need to support your business? How is the security on and directly off property? Are there zoning issues associated with your intended space?

Consult the Professionals

When in doubt, it’s absolutely worth it to consult a professional. From lawyers to real estate brokers, and commercial agents, many experiences professionals can offer their services and help you negotiate the terms of a lease that will benefit both parties.

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