Choosing the Right Commercial Lease for Your Business
I’m looking for the right space for my new business, and I’m not too familiar with commercial leases. But I’ve rented residential property before… Doesn’t it work pretty much the same way? What’s the worst that can happen? If this space turns out to be wrong for my business, I can probably get out of the lease, right?
Those are just some of the questions new business owners often ask about commercial leases. We can’t possibly address every question you might have in a single blog, but if we can impart one piece of wisdom, here it is: The laws regarding commercial leases differ significantly from those regulating residential leases.
For example, terms of residential leases tend to operate on an annual agreement. When you rent an apartment, you can often leave after only a year if you’ve decided it is not the right place for you. But under commercial leases, you might be subject to a five or even ten year agreement. Check your leasing term carefully before signing a contract; if the location or space turns out to be wrong for your business, you could be stuck there for quite some time.
And no, you cannot just get out of the lease if you change your mind. Residential leases are not easy to simply break either, but commercial leases, since they involve business ventures and typically larger sums of money, are often fairly strictly enforced. Once you sign a commercial lease, you’re on the hook for those payments, whether or not your business succeeds. Additionally, and especially for smaller businesses, commercial landlords often require a personal guaranty, which will prevent the business owner from taking liability shelter behind the business entity if the business fails.
For that reason, carefully investigate all terms of the lease before you reach an agreement. Commercial leases are often lengthy and complex, sometimes including multiple addenda and terms that have a particular meaning in the industry. They do not make for simple, easy reading. Among other things, look for the following items:
- rent escalations – how are they computed and how much increase is allowed?
- Insurance, property taxes, and maintenance costs – does the landlord pay these, or will you be billed separately for them or as part of a common area maintenance accounting?
- Conditions of the space – will modifications be needed, called tenant improvements or TIs, and who will pay for them?
- Specifications for signage – where can you hang your sign(s) and are there any restrictions?
- Is the lease renewable? – location is important to the success of your business. If you like the space, you will probably want to stay there indefinitely. Additionally, if the lease is renewable, what is the rent for the option period?
- Under what conditions can the lease be terminated?
Even though it can be more difficult to get out of a commercial lease, they are often more flexible with regard to negotiations upfront. So, take your time, seek to fully understand each aspect of the lease, and make your needs and requirements known to the landlord. Most importantly, call us and speak with our real estate attorney if you have any questions. It is critical that a commercial lease be reviewed by someone who understands what you will be facing as a tenant and can interpret the complex provisions often found in a commercial lease. It is better to be informed before making this decision rather than to find out later you have made a mistake.