Whether it’s a physical storefront, office space for a growing team, a new franchise location, or in the wise words of George Carlin, a place for your stuff, businesses will likely need to lease commercial space at some point. Unfortunately, these leases are dramatically different from the lease you signed for your college apartment without reading it. To make matters worse, the law is less worried about protecting you (as the commercial tenant) because commercial parties are believed to be on “equal footing” even if one of them has never leased commercial property before.
Before you sign, there are some great rules of thumb to consider, including:
Find a reliable and experienced commercial broker (and not the broker who helped you buy your home) who will advocate effectively on your behalf and who understands the specific market and options available…and an experienced commercial real estate lawyer (not the lawyer you know from church that helped you with your will) to review your lease as they will likely pay for themselves ten times over in the issues you are able to avoid;
Make sure the location in the community is effective for your intended use of the property (traffic levels, demographics, foot traffic potential, etc.); and
Understand the business context of the lease. This includes things like:
what the area’s future development plans are,
what the rent cost covers and does not cover (you might be surprised about things like maintenance, common areas costs, taxes, insurance, etc.),
how base rent, additional rent, and subsequent rent increases will be calculated,
what happens if the landlord goes bankrupt? Said another way, how you can stay in place and continue to operate? Meaning: seek an a nondisturbance agreement,
what security deposit is required, if any, and what will it take get that deposit back (and when), and
the various mechanics of the lease because there is no standard commercial lease form.
Beyond these basics, where do I see the most common disputes between commercial landlords and tenants arise, and how can you avoid them? See below, and as is often the custom at PrepOverCoffee, explained with great songs from the past. You are welcome for the earworms.
It’s in the way that you use it: Your planned use
Just because a landlord enters into a lease with you, that does not mean your intended use for the space is permissible under zoning laws, building code, etc. I have heard horror stories about leases signed by commercial parties, like restaurants, only to find that operating a restaurant is not permitted in the location, or worse, alcohol sales are prohibited. So, make sure your broker, or you, have done the research and due diligence to ensure your intended use is permissible and seek to have the landlord represent that to you in the lease.
There goes the neighborhood: Your neighbors
An important provision in any commercial lease includes what other, including potentially competing businesses, may also be permitted in the location. For example, are you okay if your business is next to a strip club (or another “vice” use)? Or if your local coffee shop is next to another bigger and more successful or well-known coffee shop? And, if you are in a strip mall or other shared space, what noisy things can your neighbors build or construct while your business is operational? Finally, what are the nuisance provisions in the event you produce certain smells to operate your business (again, think restaurants whose delicious smells waft out into the world), or worse, your neighbor smells like a pile of burning tires?
There must be some misunderstanding: What the space includes, and does not include (and it may not be what you assume)
Your lease should include information about an estimated footprint and layout and sometimes the approximate square footage number, which may include usable space for your business, dead space, or common areas like restrooms, hallways, or parking lots. It is critical to understand how square footage is calculated for cost reasons, but more importantly, what access and usage is permissible for things you might assume are available due to their proximity to your space, like elevators and restrooms. Finally, what are the landlord’s responsibilities related to parking? Will your business have designated spaces or share with other high traffic neighbors? What happens if parking becomes inadequate for your customer base? Do you want them “waiting in the rain for hours?” This is the area where the most misunderstandings occur because the tenant is often approaching the situation with seemingly obvious assumptions that they haven’t thought to discuss with the landlord.
Sign, sign, everywhere a sign: Will your desired signage comply?
If you are expecting deliveries or customers to visit your place of business, how will they find you? Do you want to benefit from the advertising potential that signage creates? Then it is critical to understand what signage is permitted under the lease, including whether the landlord will place your business name on the building, permit a freestanding sign at the entrance, or include you on directories or other places that summarize all of the business in the buildings. And, don’t forget to make sure to include those rights for the duration of the term of the lease (some landlords, especially after a sale, seek to retrade or take signage and other rights away unless they are expressly protected).
The payback: Your personal guarantee
Remember when you set up that limited liability company (LLC) to protect your personal assets from liabilities arising from your business? A personal guarantee in a lease will trump the business entity protections. A personal guarantee is a protection often sought by landlords to ensure they are made whole if your business fails. Said another way, if your business (especially a new business with unpredictable returns) cannot pay the amounts due in the lease, then you (personally) will be responsible for paying those amounts. It is also critical to understand assignment and sublease provisions, as an additional option if your business is not successful or if you need the flexibility to make dramatic changes.
Hold on loosely: Lease term, termination, and holdover
Unlike personal leases, commercial leases tend to run anywhere from one year to a decade (or more) with options to renew for successive terms. It is critical to do a cost analysis on how long the lease term should be for your business, understand how to prevent any auto renewal or auto payment triggers of your lease by missing a notice deadline, how continuity for your business will be protected by ensuring that a renewal of the space will be available, and protecting against “market / variable” price increases at renewal when you are likely more dependent on maintaining the specific location of your business. In addition, if you need to terminate the lease, what is required and what are the costs associated? Finally, holdover provisions are critical if, at the end of the lease term, you need bigger space or the time to find another location and take steps to effectively relocate your business? You may not need an entire lease term, but understanding the requirements to stay in the location after the lease term ends is important to your long-term planning.
I will try to fix you: Maintenance, repair, improvements, and modifications
Many tenants assume that commercial landlords are always responsible for repairs. This is actually not the case, and can be the cause of tremendous strife and significant cost for the tenant. In addition, who is responsible for the costs of preparing the location for a particular business (think shelving, counters, restaurant equipment, etc.)? And, is the tenant responsible for removing the business-specific improvements at the end of the lease? Finally, which party (tenant or landlord) is responsible for the costs associated with complying with the Amercans with Disabilities (ADA) provisions and other building code changes which might come up after the lease is signed and during the term of the lease?
Take out some insurance: Landlord and tenant policies have to work well together
And finally, PrepOverCoffee cannot do an article without mentioning the importance of insurance. Here, it is critical to understand whose policy covers what because both the owner and the tenant will be impacted by a loss. The interplay of the policies between landlord and tenant are critical to ensure you (as the tenant) are protected from unexpected liabilities and additional costs and losses. Many leases only address tenant responsibilities for insurance, but there are certain insurance requirements a tenant is going to want from the landlord. For example, if there is a flood, what coverage do you look to as the landlord’s flood coverage may only protect their interests? Same with other perils, including terrorist attacks or earthquakes in areas where those events may be more likely. Or what if someone falls on the sidewalk outside the business? Who is responsible for that?
These are just a few of the most problematic areas of a commercial lease. Hopefully, by avoiding these pitfalls, you will level the playing field between you and your Dear Landlord.
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