After months of searching you finally found the perfect location for your business. The rent is reasonable, the size is just right, the landlord seems nice. You can already picture your business in this location. You ask to review the lease and the landlord says “Oh, it’s just a standard lease. Everyone signs it.” STOP! There is no such thing as a “standard” commercial lease. Review is always necessary, preferably by an attorney who can negotiate the various provisions to your benefit. Here are just some of the provisions that are negotiable and not nearly standard.
1) Personal Guarantees
Most landlords will likely ask that the lease be personally guaranteed by someone. Typically this is the principal of the LLC or corporation but does not need to be. A personal guarantor would be responsible for rent and any other payments due on the lease if the tenant, typically the LLC or corporation, does not pay. While this is exceedingly common, there are limits that can be negotiated. This may be one of the most important points of a commercial lease review.
If the potential space is located in a shopping mall, or even if the same landlord owns several properties in a small area, you, as the tenant, may be able to negotiate a provision that would prohibit the landlord from leasing space to your competitor.
3) Common Area Maintenance Charges
Is there a parking lot that services multiple businesses or a building elevator used by all the tenants? There are likely to be monthly or quarterly charges for the maintenance of these areas. It is important to review the commercial lease to ensure that the charges are explicitly enumerated. These charges can be a percentage of actual costs or a fixed amount. No matter how the charges are calculated the lease should stipulate how responsibility is designated and how often charges can be increased.
4) Term, Renewal, and Options
The initial term for most commercial leases is typically two to five years. Of course there may be longer term leases for businesses involved in manufacturing or otherwise have heavy investment in equipment. When negotiating the initial term it is important to focus on the amount of space the business will need as it grows. When conducting the commercial lease review it is important to focus on renewal and options. A renewal typically involves another terms similar to the first where the rent is pre-negotiated. Generally, with a renewal the tenant must simply let the landlord know by a certain date whether or not the tenant will stay for the renewal period. An option is the ability of the tenant to extend the lease but the rent is usually negotiated at the point when the option is exercised.
5) Assignment and Subletting
Landlords like to restrict the tenant’s right to assign or sublease the premises. Be careful before you agree to such a provision. The way the provision is worded can restrict your ability to change the entity form or even take on a business partner. Tenants often do not consider the implications of these restrictions at the time of lease signing. However, there are any number situations that may arise that will result in a need to assign or sublease. What if you choose to sell your business two years into a five year term? It is a good idea to negotiate these restrictions at the outset.
6) Use Restrictions
It is important to know how the leased space will be used and ensure that use conforms with the space itself. The lease may specify restrictions on equipment that can be installed or limit the load per square foot. Before signing the lease ensure that your plans for the space will work within these restrictions. The lease may also restrict activities permitted in the space. Again, it is important that your business goals are inline with these use restrictions.
The commercial lease will have a requirement that you, as the tenant, maintain insurance. Review the type of insurance required and the amount. Make sure the amount is not excessive for your business.
8) Tenant’s Work
In most situations the tenant is responsible for the build out process. When conducting the commercial lease review, pay careful attention to how much control the landlord has over the process. It is common for the landlord to require general construction plans and approval of those plans. However, make sure you will not be limiting or slowing your work by seeking landlord’s consent at every step.
9) Notice of Default
The notice of default is essentially the landlord’s ability terminate the lease early based on a default by the tenant. This right can either be at landlord’s option upon the occurrence of a default or automatic upon that occurrence. If the right is automatic the landlord may begin holdover proceedings when there is a default.
10) Damage and Destruction of Premises
In the event of fire or other casualty the landlord will be responsible for certain repairs. The commercial lease will stipulate the time frame and extent of work. Ensure these are reasonable and will not unnecessarily delay your own repairs.
This post is for informational purposes only. It is not intended to be, nor should it be construed, as legal advice. Always consult an attorney, licensed in your state, before taking legal action.