Commercial leasing: what you don’t know can hurt your business
If you have decided to go into business for yourself, you likely focus on maximizing profits. Although profits are important, they are not the only factor that determines the success of the business. An often-overlooked factor that can make or break a business is the commercial lease agreement that is in force. As an unfavorable lease agreement can lead to unexpected costs, expensive legal fees for lease disputes and bankruptcy, it is important to have a basic understanding of the nature of commercial leases.
One common mistake that people make about commercial leases is assuming that they are more or less the same as residential leases. This is certainly not the case. Some of the differences are:
• Less protection: Commercial renters are not protected by the same consumer protection laws as residential ones.
• Non-standard agreements: Most commercial leases are not standard forms, meaning that they often are customized to favor the landlord’s interests.
• Flexibility: Because there are no standard forms (and consumer protection laws), most of the terms of a commercial lease can be negotiated.
• More Binding: Unlike residential leases, commercial leases cannot easily be broken, which once entered into, can put the business on the hook for a significant amount of money over a long period.
Making the lease fit your business
One of the most important terms of a commercial lease is the rent and duration of the lease. Aside from making sure that your business can afford the rent, it is important to note that landlords will attempt to get you to enter into a long-term lease if possible, offering favorable rent rates. Since the location of your business may not be suitable for your needs in a few years, it is advisable to negotiate a shorter lease with an option to renew, even if it is more expensive. Additionally, it is important to include an option allowing you to assign and sublet your space, should your business fail or need to relocate before the end of the lease.
Another aspect of a commercial lease that you need to look out for is the allocation of expenses such as property improvements, repairs, maintenance, utilities and code/legal compliance (e.g. the Americans With Disabilities Act). Obviously, landlords will attempt to shift these costs onto the unwary tenant. As these costs are unpredictable and expensive, they can have a significant effect on the bottom line.
Finally, it is important to ensure that the final lease has terms allowing the use of the property in the manner required by your business. For example, if your business relies on walk-in traffic to succeed, you need the lease to allow you to erect signage on the property. Also, it is important that the lease allows you to make other modifications to the space that are necessary for your business to succeed (e.g. add a loading dock or cubicles) Additionally, it is especially useful to add an exclusive use clause that prohibits the landlord from renting space to other businesses that are competitors.
An attorney can help you
Commercial leases are full of potential traps for the uninitiated. Because of this, it is vital to consult with an experienced real estate attorney before signing the lease. An attorney can review the lease, consider the needs of your particular business and assist you in negotiating a lease that will best protect the interests of your business.