Commercial Lease Negotiations: Key Clauses to Review
There are times when a business signs a commercial lease that it has the keys to its future. They find the perfect spot, arrange the rent and begin to visualize the sign above the door and opening day! Leases can be the afterthought: a lengthy document between the business owner and the energizing start of a new business. But that’s not a piece of paper! It can help it identify how much you will actually pay for the space, who will have to pay for any repair work that needs to be carried out, how hard it will be to leave the business if you have to, and how much it can cost you when the business expands. In many respects, a commercial lease is a set of rules for your business which is why it can be a very expensive way to skim the surface is to read it solely for the monthly rent.
The rent you see is not always the rent you pay!
It’s important to know that the rent offered in the advertisement might not be all the cost of living in the premises. Other costs imposed on the tenant may be property taxes, insurance, maintenance, common area costs, utilities or others depending on the type of lease. This is the reason why you should talk to a good lawyer for real estate transactions. The extra costs can make an attractive space much more of an expensive proposition. In negotiating, it’s important to consider more than just the base rent and what additional charges will be applied, who they will be charged to, if there are limits on increases, and if there can be access to records to support the additional charges. If the costs associated with a low rent are not predictable, it may not be a good deal.
Look Beyond Today’s Monthly Payment
Rent change is no less important, it should be given the same consideration. While the business owner might be happy with the rent they are paying, their thoughts and concerns about rent in three, five or ten years will likely be different. Future rent may be calculated by fixed annual increases, percentages or by formulas based on the market. It’s not just that rent is going to go up, it’s that you’d better know exactly HOW it will go up! When considered individually, the small percentage might be not so big of an issue, but multiplied over the long run, it may become quite a substantial impact on the ongoing cost of a business.
What if Your Business has to Move?
There is an opposite scenario which should be considered as well. Companies change. But the partnership could end, the business could be sold, the company may outgrow the property, or the economy may change for various reasons, making the original location unfeasible. This is where the assignment and sublease provisions come into play. Once in a while, a tenant would like to sell the lease or vacate part of or the entire space to another business. Whether that is possible may be strictly dependent on the language of the lease. Limits on assignment and subletting should be analysed, therefore, based on the future, not the assumption that the business will be the same for the full length of the lease.
Who pays for the Build-Out?
The same consideration should be given to the physical improvements to the property. Many commercial buildings need work prior to their use for a specific business. New flooring, walls, electrical, specialized plumbing, lighting, signage or equipment installations may be required for a tenant. While a landlord could potentially provide a tenant with a landlord improvement allowance or agree to make certain improvements, these are not to be taken on faith; they must be clearly reflected in the lease. The parties should be aware of who is responsible for the work, who will be paying for the work, what standards will be used, who will own fixtures and improvements and what will happen to fixtures and improvements when the lease comes to an end. If these responsibilities aren’t clearly defined and forthright when the new space is created, it can turn into a costly issue.
Something Breaks, Who Gets the Bill?
Another aspect of repairs and maintenance where assumptions can be costly is the installation of sewage backup components. Installing sewage backup components is another area in which repairs and maintenance can be expensive. No one wants their air-conditioning to go down when they’re signing a lease, their roof to leak or a critical part of the plumbing to come undone. However, many commercial property repairs are governed by the lease and over time, even the best of properties need repairs. But, is it just a tenant or landlord involved in “maintenance.” The agreement should differentiate between routine maintenance, significant repair and replacement of equipment and structural problems (as applicable). If it wasn’t for that, a disagreement could occur right when the parties are already having to deal with a costly issue.
Read the Default Clause Before You Need It
On the other hand, default provisions outline the consequences of a relationship that doesn’t go the way it should. A lease can include clauses about late rent, violating its conditions, not having the proper insurance, alterations, or any other “default. An agreement can allow for resolving some issues, deadlines or remedies for the landlord. A tenant would find it beneficial to know these to see how much time there is to solve a problem before more serious issues can occur. Well-worded default clauses can provide a clearer guide for a landlord in handling the situation when the tenant does not live up to its obligations.
Final Thought: Conclusion
A commercial lease could be a lease agreement regarding a building, but its effects could extend beyond the business enterprise in the building to the financial and future of the business. During the negotiation process, some clauses may appear unimportant, but once things get to a certain point, they can be the most critical clauses.
The best time to talk about your plans for what happens when it goes wrong is while it’s going right.