Entering a Commercial Lease

Entering a commercial lease can be a complex task and is a considerable venture. It establishes a long term relationship with another and creates legal and financial responsibilities for both sides. Accordingly, much thought should be given to the terms of the lease before signing on the dotted line.

Once you have identified a location suitable for your business, some of the key terms to pay attention to are the cost, the use, repairs, subletting and the term. Regarding the cost, first find out if the rent will be on a gross or triple net basis. And, even if the rent is stated as being gross, find out if there are any additional costs, e.g., utilities, water, trash, etc. If it is a triple net lease (i.e., rent plus a portion of the property’s taxes, insurance and common area maintenance charges), determine what percentage of the total area your space occupies and what those costs are. Additionally, what kind of security deposit and insurance coverage is required? Further, will the base rent increase and, if so, when and for how much, and are there any other expenses listed? Simply looking at the monthly rent amount will NOT give you an accurate idea of how much this is going to cost you.

Secondly, what type of business do you plan to operate, and what is the stated use? Obviously, they should be in agreement. Also, does the use acknowledged in the lease allow for developing the company to add to and/or modify the products or services offered? In addition, look for any exclusive use language - are you being given the exclusive right to operate the type of business intended in the development, and do any other tenants have the exclusive right to operate theirs that might affect your potential growth?

One subject that needs to be spelled out clearly is that pertaining to maintenance and repairs. While many landlords and tenants think that this is fairly straightforward, it often can be anything but that. Who is responsible for the major items, like the structure; floors; roof; plumbing; electrical; heating, ventilation and air conditioning (HVAC) systems; windows; signage; etc.? Although there may be “standard” allocations of maintenance responsibility, those do not necessarily dictate how every lease handles the matter. Moreover, when repairs are needed, what notice is required, what cure period is allowed, and what are the consequences of the landlord or tenant not making or initiating the necessary repairs within the allotted time frame?

Next, review the sections dealing with assignment and subleasing. Most commercial leases only allow either upon approval by the landlord. If the desire to sublease potentially may arise, it probably is a good idea to discuss it at the beginning, rather than later. Additionally, any restrictions on assigning the lease may limit the ability to sell all or a portion of the company at some point in the future and, thus, should be closely analyzed, too.

The last major clauses to review are those addressing the term and termination of the lease. How long is the initial term and are there any options to renew? If there are options, will the rent and any other terms change during the option period(s)? Finally, what are both sides’ termination rights, and what are the penalties and remedies associated with early termination?

Although these are some of the principal terms of a commercial lease, there are many other important items to consider, such as audit and inspection rights, indemnification, notice requirements, late fees, and requests for a personal guarantee, to name a few. And, even if a standard form lease is being used, it is still necessary to review the entire document to make sure you agree with its terms and conditions. Lastly, if the lease or any addendum has been drafted by the other side, be sure to hire an attorney competent in these matters to counsel and represent you in the process. The money spent now potentially could save you much more in the future.