Property Leasing 101: Commercial Lease Made Simple
Thinking About Leasing Commercial Space?
You own a business and you need to lease space, right? Or perhaps you are just starting out your new small business.
A prospective landlord hands you a document that spells out the terms of a lease and you read through it. It seems to spell everything out pretty fairly. You need to get it signed so you can get in there and start tenant improvements right away. You want to open for business in 3 months.
Not so fast.
Let's go over some of the key factors that should be in a commercial lease from a tenant's perspective. And, no matter what, you should definitely take any lease to a lawyer for review. The relatively small investment you make at the outset could save you thousands in the long run should something go wrong in the future, or if market conditions change.
Could This be the Right Space for Your Business?
Commercial Lease Guide
Key Provisions of a Commercial Lease
1. Use: Does the lease specifically state what you can use the building or space for? If not, it should be clear. You don't want arguments later that the landlord thought you were going to be leasing the property for an art gallery only, but not an art studio. There is a pretty big difference. Spell it out clearly. You need to make sure that the use is allowed by local zoning laws, as well. This is your responsibility, and not the landlord's.
2. Term. Make sure that you know exactly how long you can use the space, and get renewal terms, if possible. Ideally, you'll get renewal terms automatically if you are current on rent and not in default. Think about how long you'll want to run your business in this location. 10 years? Do you want to be locked in for that long? Maybe start with a 3 year lease, with 1 year renewals thereafter. This should be part of your business plan. You could be liable for rent long after your business is no longer in operation. Or, the reverse could be true, you could be out of a space if the lease comes up and you're forced to look for a new place to rent. This is a critical point of negotiation.
3. Assignability. What if you decide to reorganize into a corporation or partnership? The lease should be freely assignable to the new entity. Landlords may want the right to deny assignment to any other entity. Think about whether this is an important factor in your business plan.
4. Subleasing. If you decide that you don't need all the space, you may want to sublease a floor, or a portion of the space. This is a benefit that not all landlords wish to grant. Talk about this upfront and decide the terms (whether the landlord can object or not).
More Considerations for a Commercial Lease
5. Destruction or condemnation. If the building burns down or is condemned by the state, what happens to your interest in the property? You need to know and the lease needs to spell this out. If you aren't happy with what it says, negotiate, or walk away.
6. Common areas. If the space is part of a larger building, what areas do you get to use, and what are the terms? Lobby, elevators, parking garage, etc? Are there hours of operation? You need to know so that you can plan business operations accordingly.
7. Parking spaces. How many do you get? Do you get any? This is a huge consideration in many cases. Your customers or clients need to have spaces to park. If there are not enough places for their vehicles, they may take their business elsewhere.
8. Tenant Improvements. Who makes them? Who pays for them? Who keeps them when the lease is over? If you have invested a lot of money on countertops and shelves, you will probably want to recoup that money at the end of the term.
9. Operating hours. Will the landlord require you to be open certain days and hours? In malls, landlords often have go dark requirements that prohibit tenants from "going dark," i.e. failing to open during certain hours or certain days. Be sure you are clear on this. This will definitely impact your overall business plan, the number of employees you hire, and whether you can escape to Hawaii during the holidays.
10. Notices. Both sides should clearly set forth where and to whom notices should be given. This should include payment of rent and when payment is deemed to be delinquent. Most reasonable leases allow at least a 3 day grace period. Don't be late more than 3 times during the initial term, however.
A careful review of the terms of your lease is required if you are to succeed as a business owner. Take your time and go over it with your business partners (if any) and definitely your lawyer, accountant, banker and anyone else that is invested in the outcome of your operation. If the terms are not fair, then either negotiate, or find a different location with a new landlord. Don't take risks in this regard. Your future success depends on it!
© 2008 Stephanie Hicks
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