Read this before you sign on the dotted line of a commercial lease
Finding the right space for your business can be tough. You may have conducted a technical feasibility study to assist you in your search, or at the very least compiled an extensive list of essential features. You’ve had to think about location, visibility, parking, handicapped access, maintenance, insurance, safety, and advertising restrictions, and that’s before you even get to the small matter of cost. And now you’ve found it. The perfect address.
Before you sign on the dotted line of a commercial lease, however, there are a few things you need to look out for. These leases will be a little different than what you are used to and may include clauses that can be painfully expensive to the unsuspecting. Here’s where you need to pay attention.
1. Net Leases
In a residential lease, your landlord usually pays for the insurance, taxes and maintenance for the property and passes those costs along to you in the rent. A fully serviced commercial lease works the same way. The landlord pays the bills and then folds those costs into your rent as a “load factor”.
In a net lease, the tenant pays a portion or even all of these additional costs on top of their rent. A double net lease requires the tenant to pay the taxes and insurance, and a triple net lease has the tenant paying for taxes, insurance and maintenance. Finally, a percentage lease requires you to pay the landlord a certain percentage of your monthly sales on top of your base rent and can be combined with a net lease.
Always begin by determining exactly what type of commercial lease is being offered. Your rent may only be a small part of the actual costs you’ll be expected to pay every month.
2. Renewals and Rent Increases
Most commercial leases expire after a fixed term, following which you are only committed to paying rent on a month-to-month basis. That’s great if you find out your perfect location wasn’t so wonderful after all, but fatal if you’ve built a solid client base and suddenly find yourself having to move. Renewal clauses can be optional or automatic, and optional ones have the advantage of giving you the chance to renegotiate the terms of your lease. Make sure you understand the renewal procedure and pay close attention to the deadlines for giving notice of your intentions.
If you’re signing a net lease, increases in taxes or major repairs can bump up your monthly payments. Your rent will also go up annually with an automatic renewal clause, and you may not be able to negotiate your former rate if you exercise your option to renew. Also, be aware that some leases include an acceleration clause. If you miss a payment, the landlord may have the right to demand the whole balance of your rent for the remainder of your lease.
3. Assignments and Subleases
In the event that your business doesn’t succeed, or you want to move before the lease is up, try to negotiate the right to sublet or assign your lease to someone else. Subleasing means you’re still responsible for all the terms of your lease agreement, but you can allow someone else to use the property and recoup the costs from them. Usually, the landlord will have a say in who can sublet the property from you.
Assigning a lease means handing all of your responsibilities over to another party. They are then responsible for the terms and conditions of the lease and you’re off the hook. Just make sure to get a full release from both parties before you walk away.
Commercial leases can be complex and will include a host of other clauses. These will outline your use of common elements like a lobby or parking lot, define who’s responsible for garbage pick-up and snow-removal, and determine whether you’ll get any compensation for permanent improvements you make to the property. Seeking advice from a commercial real estate attorney will ensure you know exactly what you’re getting into, and whether you can get back out if the unexpected happens.
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