By: Joshua Hancock, Law Clerk, Dorman Bell, LLP
Renting the right commercial space for a growing business is just one of the key components in reaching economic sustainability. Leasing a commercial space is not like renting an apartment, negotiating the lease often becomes quite complex. For many small business owners, leasing obligations can be the company’s largest financial commitment so it is highly recommended that any new business has its leases negotiated and reviewed by an experienced attorney or firm.
WHAT IS BEING LEASED?
Is the space described in sufficient detail? Is the square footage accurate? Is the floor plan correct? A common mistake many tenants make is not verifying the space they’re renting. The actual space a business plans to use is referred to as the “usable area,” yet the rent in the agreement is based off the “rentable area.” For example, the rentable area sometimes includes an area like a hallway, corridor, loading dock, or parking lot. Not recognizing the rentable space may leave a tenant overpaying for the property or even sometimes worse, unforeseen liability.
WHAT IS THE RENT?
How is the lease structured? Is tenant responsible for utilities, property taxes, repairs? Does the lease contain an escalation clause? An escalation clause is what increases the tenant’s base amount of rent over the duration of the lease. Except for short-term leases, landlords generally include the clause for the purpose of keeping up with the increases in the costs of maintaining buildings. An escalation clause can be calculated in several ways. The most common methods include the percentage increase in some kind of inflationary index; the increase in the landlord’s actual operating, maintenance, and insurance expenses plus real estate taxes or as a fixed annual rate. Not budgeting for these extra costs leaves the possibility of incurring huge expenses down the road.
WHAT ARE THE PARTIES RESPECTIVE RIGHTS AND OBLIGATIONS?
What is the permitted use of the space? Does the business comply with current zoning laws? Knowing whether a business complies with local zoning requirements is tenant’s responsibility, not the landlord. Most leases include a clause defining what a business can and cannot due. A tenant should always seek broad usage clauses. This provides tenant with the flexibility to expand into other activities.
ARE THERE FLEXIBLE ASSIGNMENT AND SUBLEASING PROVISIONS?
May tenant assign or sublease the space? May tenant make any structural changes to the premises, such as a wall? Many new businesses sign short-term leases because of uncertainty. If the business flops, being obligated for another twelve months rent is crippling. If the business thrives, the company may need to relocate either for a larger space, better facility, or better location. What are tenant’s options in these situations?
TENANT’S SURRENDER OBLIGATIONS?
At the termination of the lease, must the premises be restored back to its original condition? Do any alterations or improvements need to be removed? Does tenant have the unequivocal right to remove its fixtures? Equipment? A lease should address not only what modifications and improvements can be made, but also whether tenant or landlord will be paying for them.
DO THE RULES AND REGULATIONS MODIFY THE LEASE?
Does the lease agreement reflect both parties’ true intentions? Often times, a landlord and potential tenant negotiate orally. Even if both parties believe they agree on an issue, the actual words in the contract will govern any future issues. Reviewing the rules and regulations in the agreement is vital for ensuring each provision sets out exactly what the provision was meant to accomplish.
Leases are legal contracts, once pen hits paper the deal is done. Generally, if a dispute arises down the road, the parties must abide by the terms within the contract. A lawyer can give legal advice, draft new clauses, and help negotiate the terms and conditions of the commercial lease. In the end, using an attorney can be a small, but invaluable expense.