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Commercial Leases-the 101

Commercial Leases-What You Should Know

Renting commercial space is a big responsibility—the success or failure of your business could ride on certain terms of the lease. You should understand how commercial leases differ from the more common residential variety. Before you sign anything, make sure you understand and agree with the basic terms of the lease, such as the amount of rent, the length of the lease, and the configuration of the physical space.

Commercial Leases Differ from Residential Leases

Practically and legally speaking, commercial leases and residential leases are quite different. Here are the main distinctions between them:

• Fewer consumer protection laws. Commercial leases aren’t subject to most consumer protection laws that govern residential leases. There are no caps on security deposits or rules protecting a tenant’s privacy.
• No standard forms. Many commercial leases aren’t based on a standard form or agreement; each commercial lease is customized to the landlord’s needs. As a result, you need to carefully examine every commercial lease agreement.
• Long-term and binding. You can’t easily break or change a commercial lease. It’s a legally binding contract, and a good deal of money is usually at stake.
• Negotiability and flexibility. Commercial leases are generally subject to much more negotiation between the business owners and the landlord. Businesses often need special features in their spaces, and landlords are often eager for tenants and willing to extend special offers.

Making Sure the Lease Will Fit Your Business

Before signing a commercial lease agreement, you should carefully investigate its terms to make sure the lease meets your business’s needs. Consider the amount of rent and the length of the lease. Don’t tie yourself to a five- or ten-year lease if you can help it; your business could grow faster than you expect, or the location might not work out for you. A short-term lease with renewal options is usually safer.

Think about the physical space. If your business requires modifications to the existing space—for example, adding cubicles, raising a loading dock, or rewiring for better communications—make sure that you (or the landlord) will be able to make the necessary changes.

Other items spelled out in the lease might be just as crucial to your business’s success. For instance, be sure that your lease gives you the right to put up a sign that’s visible from the street. Make sure your lease prevents the landlord from leasing space to a competitor.

Critical Commercial Lease Terms

Before entering into negotiations, you need to learn a bit about the terms of a business lease.  The following list includes many items that are often addressed in commercial leases. Pay attention to terms regarding:

• the length of the lease (lease term) when it begins, and whether there are renewal options.
• rent, including allowable increases (escalations), and how they’ll be computed.
  • Does the rent you pay includes insurance, property taxes, and maintenance costs (gross lease); or whether you’ll be charged for these items separately (net lease).
• the security deposit and conditions for its return

Know the Space You’re Renting

Familiarize yourself with the space including common areas such as hallways, restrooms, and elevators. Review how the landlord measures the space -some measurement practices include the thickness of the walls.

Know What you Can and Can’t Do in Your Space:

• Get to know the specifics of using your space. Be sure to include what goods and services you can sell, and when and how you can sell them (defined in a “use clause”).
• Whether there’ll be improvements, modifications (called “build-outs” when new space is being finished to your specifications), or fixtures added to the space; who’ll pay for them, and who’ll own them after the lease ends (generally, the landlord does).
• Signage specifications including where you can put them.
• Who handles maintenance and repairs on the premises, including the heating and air conditioning systems.

Other Issues to Consider

• Necessary insurance policies you’re required to take out, such as liability or property insurance.
• Can the lease be assigned or subleased to another tenant.
• What is the option to renew the lease or expand the space you’re renting.
• If and how the lease can be terminated, including notice requirements, and whether there are penalties for early termination.
• What counts as defaulting under the lease and any remedies you’re entitled to if the landlord doesn’t live up to their obligations under the lease, and vice versa.

Commercial leases can quickly become complicated and you might have various considerations when looking for and negotiating the perfect spot for your business. If you need help specifying certain conditions for your business or defining legal terms, consider talking to a contracts attorney with experience negotiating commercial leases. They’ll know which terms and conditions to fight for, and they can clearly explain your responsibilities under the lease.