Commercial leases are complicated. These tips will help you sort through the legal jargon.
- Research is the key to signing the right business lease. Specifically, look at the building owner, landlord, zoning laws, environmental expectations and nuisance laws.
- Know how much you have to pay, what exactly you’re covering and how much your rent will increase each year. Some leases include extra payments (e.g., utilities, insurance or maintenance), while others fold all of your expenses into one monthly lump sum.
- Establish details on how your lease will be transferred if your business closes or you move. Two examples are assignment of the lease, which allows another business owner to fully take it over, and subletting.
Signing a lease is an important step for any new business owner. Whether you are opening a store, moving into an office space or renting out facilities for production, at some point, you’re probably going to have to reserve a space for your business.
Once you’ve found that space, signing the contract could feel like an annoying final step before you can get moved in and focused on running your business. But like most legal agreements, a business lease is an important document that requires some research.
It should be no surprise that the fine print is very important. There are two basic steps to take before signing a lease: Do extensive research, and be aware of typical statutes included in business leases.
Steps for research include vetting the landlord, determining the building owner, researching zoning laws and getting a general feel for the area. Before you sign a lease, make sure you get an idea of the payment structure, your own personal risk exposure, the transfer structure, the landlord’s desired holdover rate and any nuisance clauses in your lease. These are some important things to look out for, but keep in mind that typical commercial lease practices vary by state.
Commercial lease vs. residential lease
A commercial lease is required any time a business rents a commercial property for the purpose of conducting business from that location.
- While both involve a landlord renting space to a tenant in exchange for money, a residential lease cannot be used for business purposes;
- Commercial leases are less regulated and offer less protection than residential leases
- Renters in a residential lease agreement are usually not responsible for paying property taxes, whereas with commercial lease agreements, it’s very common for the tenant to pay at least a portion of the property taxes.
Elements of a commercial lease agreement
A commercial lease agreement is a contract, so it must include certain elements and key information for it to be valid and enforceable. At a minimum, information regarding the rent, security deposit, lease duration and any additional costs the tenant may be obligated to pay should be clearly defined.
Business owners should be aware of the difference between exclusive and permitted use. For small business owners in competitive industries, an exclusive-use contract can be especially beneficial. Without exclusive permission, another competitor could rent space within the same building and try to win business from the same pool of customers.
Important commercial lease statutes to keep in mind
There are some key points to keep in mind when you are reviewing your lease. The rent structure is probably the most basic and most important aspect of any lease. By determining how much you pay per month, as well as how much your rent will increase each year, you can better determine budgets and get a full understanding of whether you can stay in business in this new space.
The lease terms are also very important. Consider short-term versus long-term leases. Long-term leases can be a great investment if you’re opening a business in an emerging or growing area, whereas short-term leases provide you with the flexibility to move locations or shutter your business if it doesn’t pan out in the way you hoped.
Both with payment structure and term, make sure you understand exactly what you’re on the hook for each month. Ask your potential landlord about how the following expenses are paid:
- Property taxes
- Maintenance (both interior and exterior)
- Local nuisance laws (noise or scent)
- Utilities (water, gas, electric)
- Modifications (whether you can adjust the interior or exterior of your space)
Once you’ve established some basic pricing and term structures, it’s time to dive into some of the less-obvious details. While your lease will likely vary by state, here are some good examples of statutes to be aware of before signing a lease:
- Transfer structure. Iron out how your lease will be transferred if you want to leave the space or your business closes.
- Personal exposure. In some cases, you may be required to sign personal guarantees when you sign a commercial lease. These agreements mean you’re personally on the hook for aspects of the lease even if your business defaults.
- Holdover rent. Holdover rent is a rent increase when a tenant stays after the lease has expired.
- Non-disturbance agreement. In many cases, if the landlord fails to pay his or her mortgage on the property, your business will still be evicted, even if you’re making all your payments. With a non-disturbance agreement, if this occurs, you’ll be permitted to stay and continue paying whatever entity has taken over the building from your landlord
Terms to know
Rent amount/base rent. This amount is calculated based on the square footage of the space. Make sure the number the landlord is using actually represents usable space. This rent is not dependent on revenue.
Usable square feet. This refers to the amount of space actually reserved for the business as a tenant, in cases of shared spaces.
Rent increases. Rent increases are usually based on a percentage of the total rent, and that can change from year to year. You can negotiate with the landlord to put a cap on rent increases.
Security deposit. This is the amount to hold the space until the paperwork is finalized. The amount should be specified both ahead of time and in the lease agreement.
Length of the lease. The length of a commercial lease is usually somewhere between three and five years, as commercial landlords prefer longer lease terms. The lease agreement also often specifies the start and end dates of the lease.
Improvements. This part of the commercial lease agreement lays out the types of improvements and upgrades that can be made to the space and who is responsible for the costs. Many aspects of this section can be negotiated.
Bottom line. Make sure you understand all of the terms in a commercial lease contract and are comfortable with them before signing on the dotted line.
Grant of lease. This is the clause that states that the landlord will turn the property over to the tenant once all of the conditions (e.g., paying the security deposit) have been met and the tenant accepts the property from the landlord.
Commencement date. This is the date on which the tenant takes over the property, more commonly stated as the first day the tenant becomes responsible for paying rent and maintaining the rental property.
Extension. Both parties can agree to an extension of the agreement in writing, and it must be signed by both parties.
Late fee. If the tenant is late in paying rent, they will incur a late fee that is outlined by the commercial lease agreement. This can be a flat fee or a percentage of the monthly rent.
Taxes. This section outlines all of the taxes associated with the property (property taxes, real estate taxes) and who is responsible for paying them. Within this section, there could be subtopics, like Contest of Taxes (the tenant can contest the amount of personal or real property tax they are responsible for paying), Payment of Ordinance Assessments (the tenant usually pays for all ordinary assessments, which are obligatory, and extraordinary, which are by choice) and Change in Method of Taxation.
Obligation for repair. This section states what types of repairs the landlord is obligated to make – like defects, deficiencies, failures or deviations in materials – that are vital to the operation of the property. It also outlines the repairs that tenants are responsible for.
Permits. Both parties are to acquire all necessary permits and licenses for making improvements or repairs at the location being rented.
Covenants. These terms are different for the tenant and the landlord; each has a separate set of covenants. For example, a covenant may state that the tenant is required to pay rent even if the landlord fails to uphold some of their responsibilities as stated in the lease.
Indemnity by tenant. This clause essentially removes all liability from the landlord in the event of injury, loss, claims, or damage, unless those things are a direct result of wilful acts or omissions or gross negligence on the landlord’s part.
Rent abatement/adjustment. This section states if the rent will be adjusted or eliminated in the event of property damage from a fire or other natural disaster.
Condemnation. This clause is often overlooked, but it’s important. It determines what happens if the rental property is taken from the landlord by a government agency for public use, either by condemnation or eminent domain.
Option to purchase. This clause states that, at any time during the lease, the tenant has the right to buy the property at an agreed-upon price. This clause isn’t mandatory, but it doesn’t hurt to include it. The clause can also state that the tenant does not have the right to purchase the property during the term of the lease. Either way, it’s good to have it in writing.
How we can help
If you would like advise on a commercial lease get in touch with our team of experts by emailing email@example.com, calling 0151 637 2034 or by booking an appointment through our free mobile app, available to download on both Apple and Android app stores.