Choosing the Right Commercial Lease for Your Business
While we can’t possibly address every question you might have about a commercial lease in a single blog article, if we can impart one piece of wisdom, it is this: the laws regarding commercial leases differ significantly from those regulating residential leases.
Starting a new business can be exciting. Entering into a lease for that business may seem easy since you’ve rented residential property in the past. But commercial leases are most definitely not the same! If you don’t have the experience to determine what you need in your lease, you may end up entering into an agreement which is unfavorable.
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 commercial leases tend to have longer terms with very limited, if any, early termination rights. When considering a commercial lease, check the term and other tenant requirements such as insurance limits. Make sure that they are acceptable to you before you execute the lease. If the space turns out to be the wrong one for your business, you may still be obligated for a long time.
You cannot just get out of the lease if you change your mind. Commercial leases, since they involve business ventures and typically larger sums of money, are 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. This means you will be personally responsible even if the business closes its doors.
For these reasons, 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 common area maintenance costs?
Conditions of the space – will modifications be needed 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 renewal period?
Under what conditions can the lease be terminated? Is there a terminate fee?
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 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.