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At the Very Lease…What to Know Before you Sign a Commercial Lease
It’s exciting when your business grows beyond the family basement (or your dining room table) and is ready to take up commercial space of its own. Leasing space, whether a storefront or an office, is a sign of business legitimacy, sustainability, and growth.
Like any contract, a commercial lease sets out the terms that the parties have agreed to. It records the details of the deal, along with the rights and rules that will govern the landlord-tenant relationship.
In some cases, the lease may be highly negotiated, with both landlord and tenant intimately involved in discussing and settling its terms. In other cases—for example, when the landlord has far more bargaining power—the lease may not be open to much tenant input at all.
In either case, tenants need to be armed with knowledge to ensure the lease is fair and to enable the landlord-tenant relationship to run smoothly. Here are my top tenant tips (alliteration notwithstanding!) for commercial leasing:
1. Rent: Ensure you clearly understand exactly how much has to be paid, when, and how. This may sound simple, but the total rent typically comprises not only base rent, but also other fees and expenses such as utilities, repair and maintenance fees, and a contribution to common area expenses. You should also clearly understand the consequences of non-payment of rent. Often, non-payment puts the landlord in a legal position to take drastic steps such as terminating the lease, taking legal action, and/or distraint (seizing of property).
2. Incorporation: If your business is not already incorporated, this might be the time. By incorporating, your company (rather than you personally) will be the tenant under the lease. This shields you from liability arising from the lease.
3. Landlord Responsibilities vs Tenant Responsibilities: A commercial lease specifies the responsibilities of each party. Don’t assume that your landlord will be providing such services as parking, snow-clearing, lawn maintenance, janitorial services, etc. Similarly, confirm the expectations on you as tenant and see what insurance is available to cover those risks—at a minimum, a tenant must have comprehensive general liability insurance coverage in the event of an accident or injury in your leased premises.
4. Term: The lease will be for a set length of time, and you need to understand what happens when that time expires. Is there an opportunity to renew or extend the lease if you want to? If so, when do you need to notify your landlord that you want to renew? Will there be a rate increase if you decide to extend the term? How is rent calculated if the lease expires but you continue to occupy the space? Conversely, what if you need to leave earlier than
originally intended or the landlord wants you out? Can the lease be ended sooner than expiration of the term? A good lease will address all these points.
5. Termination: All good things come to an end. Tenants should understand how the lease can end and what is expected of them at that time. Upon termination, whatever way it arises, tenants must typically leave the premises as they found them, except for reasonable wear and tear. This means without unauthorized material modifications, clean, and in good repair. While tenants are generally entitled to remove their belongings, some leases place restrictions on the removal of fixtures (such as cabinetry and shelving) and signage. Be aware of such obligations and restrictions before making any improvements to the space: you could be doing so for the benefit of your landlord.
So, as you get ready to move in, ask the landlord to provide a draft lease, read it (get a lawyer to review it), discuss it, and make sure you understand it. Once it is signed, you will be living with it until the end of the tenancy.
(Featured article in NLOWE’s The Advisor, Spring 2019 issue).