- The key to signing the right business lease is research. As a start, research the building owner, landlord, zoning laws, environmental expectations and nuisance laws.
- Know how much you have to pay, what exactly you're covering and how much your rent will increase each year. Some leases include extra payments, like utilities, insurance, or maintenance, while others fold all your expenses into one monthly lump sum.
- Establish details on how your lease will be transferred in the event your business closes or you move. Two examples are assignment of the lease, which allows another business owner to fully take it over, and subletting.
Signing a lease is a rite of passage for any new business owner. Whether you're opening a store, moving into an office space, or renting out facilities for production, at some point, you're probably going to have to put pen to paper and reserve a space for your business. The world of commercial real estate can be complicated, and it can sometimes take years to find the space you're looking for. Once you've done the legwork and found the space, signing the contract could feel like an annoying final step to get over with so you can get moved in and focused on running your business. Like most legal agreements, a business lease shouldn't be treated in a cursory way.
"You have to do a lot of planning when you're moving from one space to another," said Walter Gumersell, partner with Rivkin Radler. "Confirm the terms that you're going to be taking – rent, security deposit, term of the lease and the use of the space is key. You want that to be as broad as possible."
It should be no surprise that the fine print in a commercial lease is very important. There are two basic steps to take before signing a lease: Do extensive research and be aware of typical statutes included in business leases.
Steps for research include vetting the landlord, determining the building owner, researching zoning laws and getting a general feel for the area. Before you sign a lease, make sure you get an idea of the payment structure, your own personal risk exposure, the transfer structure, the landlord's desired holdover rate and any nuisance clauses in your lease. These are some important things to look out for, but keep in mind that typical commercial lease practices vary by state.
Researching the area, landlord and lease details
1. Understand the area.
The key to signing the right commercial lease for your business is doing extensive research. While looking for a new property, if you're selling a product or service to the public, analyze the area and get a good idea of your potential clientele. Location means everything for a small business to thrive, so when you're shopping around for the right properties, take your time and find the right new home for your business. Gumersell said this process can take two years or even longer, so make sure you plan accordingly if your current lease's end is in sight.
2. Find out more about the landlord and building owner.
Gumersell also said that one of the most important aspects of research that is often overlooked is learning more about the landlord and building owner. Sometimes your direct landlord may not be the true building owner. Either way, it's good practice to find out as much about the landlord and building owner as possible. You're entering a business partnership together, so make sure you have an idea of who they are, what their financial situation is and whether they're making good on their payments. In some states, for example, if a landlord fails to make his or her payments to the building owner, or fails to make mortgage payments to a bank, the business or tenant can end up getting evicted in the event of foreclosure – even if the business has been on time with every payment. That's just one example of how a landlord, tenant and building owner relationship can go awry. Gumersell said businesses can conduct a public records search to find out more about the landlord. You can also request documents related to the landlord's LLC or business entity to learn more about whether it's an ideal partner for your business.
3. Research zoning laws.
Another component to look into is the zoning laws. While your landlord may designate your space for, say, running a restaurant, you have to make sure the landlord's aims are consistent with the laws of your municipality. There are scenarios where a landlord or building owner may think they can lease their space to a certain type of business, but it doesn't match standard zoning laws in the area. By aligning these two details, you can ensure that your business can operate without any major legal headaches from the town or city you're operating in.
4. Nuisance laws and the environment.
One of the most important aspects to signing a lease is being able to operate your business to its fullest capacity once you open your doors. Many leases have extensive points on noise, smells and equipment. Anne Brookes, a tax attorney, said that when she signed a lease for her restaurant, she had to negotiate an "offensive odors stipulation."
"The building rules said no offensive odors," she said. "Whether a smell is offensive is subjective, so I made sure there was an exception for smells ordinary to a restaurant."
Gumersell said nuisance laws are important, but so are environmental laws. It's important to research basic environmental laws regarding the property before you sign anything. These laws can often be missed by landlords, and they could be used against your business. Make sure you research this aspect of the lease.
Important commercial lease statutes to keep in mind
When it comes to actually reviewing your lease, there are some basic aspects to keep in mind. Rent structure is probably the most basic and most important aspect of any lease. By determining how much you pay per month, as well as how much your rent will increase each year, you can better determine budgets and get a full understanding if you can stay in business in this new space.
In addition to pricing structure, the lease terms are very important. Weigh your options and consider short-term vs. long-term leases. Long-term leases can be a great investment if you're opening a business in an emerging or growing area. Short-term leases provide you with the flexibility to move locations or shutter your business if it doesn't pan out in the way you hoped.
Both with payment structure and term, it's important to understand exactly what you're on the hook for each month. Ask your potential landlord about the following and how it's paid:
- Property taxes
- Maintenance – both interior and exterior
- Local nuisance laws – noise or scent, for example
- Utilities – water, gas, electric, etc.
- Modifications – can you adjust the interior or exterior of your space?
Once you've established some basic pricing and term structures to your lease, it's important to dive into some of the less obvious details. While your lease will likely vary based on what state you're in, the following are some good examples of statutes to be aware of before signing a lease.
Transfer structure: It's important to iron out how your lease will be transferred if you want to leave the space or your business closes. There are generally two structures for transferring, according to Gumersell: assignment of the lease and subletting. Assignment of the lease means the entire lease is transferred to a new tenant. Subletting is when a current tenant keeps his or her name on the lease but receives payment from a new tenant and transfers that money to the landlord. In both instances, you usually have to establish prior written consent before the lease transfer. This is a very important aspect of your lease to work out.
Personal exposure: In some cases, you may be required to sign personal guarantees when you sign a commercial lease. These agreements mean you're personally on the hook for aspects of the lease even if your business defaults. Work with legal counsel to negotiate this aspect of your contract. If possible, you only want your entity or legal business to take on the risk when signing a business lease.
Holdover rent: Holdover rent is a rent increase when a tenant stays after the lease has expired. It's hard to find a lease, and sometimes when businesses are moving spaces they end up staying longer then their current lease allows while the new one is set up. In many contracts, landlords will include that in these instances businesses are on the hook for up to 250% of their normal rent payment per month. So, if you stay beyond your allotted time, it could cost you tens of thousands of dollars. Gumersell recommends negotiating this aspect down to around 125%.
- Non-disturbance agreement: In many cases, if the landlord fails to pay his or her mortgage on the property, your business will still be evicted even if you're making all your payments. A non-disturbance agreement, according to Gumersell, says that if this occurs, you'll be permitted to stay and continue paying whatever entity has taken over the building from your landlord.
Everything can be negotiated
Nothing in a commercial lease is set in stone. While these are some good examples of things to be aware of, there are likely many aspects to your lease that can be negotiated. Work with your potential landlord and, if necessary, an attorney to make sure you get the best deal for you and your business.