Commercial Leases: Find the Right Space - Without Surprises

You have a lot of options when it comes to choosing a commercial space for your business. In fact, with the economic downturn, it’s definitely a buyer’s market.

But before you sign on the dotted line, there are a few things you should know. Legally speaking, commercial leases are extremely complicated documents often heavily weighted in the lessor’s (aka: landlord’s) favor. There are also a number of differences between commercial and residential leases.

For example, commercial leases are not subject to most consumer protection laws that govern residential leases. There is no “standard form” (despite what you might hear!), so a commercial lease is generally customized to fit the lessor’s needs – not the lessee’s (aka: tenant’s). That’s why it’s critical you understand the fine print for every commercial lease agreement you’re offered.

There are a number of issues that you should be concerned about with a lease. While each business’s needs are unique, there are a number of common problem areas that arise in commercial leases. A few examples include:

Maintenance & Repairs – If the $20,000 boiler goes out in the last month of your lease, do you have to buy a new one?

Exclusive use – Can the landlord lease adjacent space to your competitor?

Calculation of Rent – Is rent based on rent-able or rented square footage? The difference could mean thousands of dollars.

Permitted Use – Will your business be able to expand its service offerings?

Personal Guarantee – As a business, you should have established a business entity (i.e. LLC, Corporation, etc.), so the lease should be in the name of the entity. Personal guarantees should be avoided or, at a minimum, limited to a reasonable time.

Options to Renew – What happens if the business is a success and you want to stay?

Notice Before Default – Make sure the landlord tells if a rent payment was inadvertently skipped or lost in the mail so you don’t end up in default without even knowing.

Common Area Maintenance (CAM) [charges in a multi-unit building] – Will the clothing store and hair salon share the water bill equally, or are the utilities separately metered?

Also, be aware of the difference between a “gross lease” and a “triple net lease”. A gross lease should mean that all expenses are included in the rent payment, and triple net leases require the lessee to pay a smaller rental amount and all additional charges separately. Either might work depending on the circumstances, but exactly which expenses will be yours is dependent on the precise language of the lease and can vary widely, regardless of what it is called.

Remember – a lease is a binding legal contract, so thoroughly review and understand the terms before signing!