Whether you’re a tenant or a landlord, signing a commercial lease is a huge task. As such, you need to understand what you’re committing yourself to before putting pen to paper.
Landlords want to maximize the return on their assets. After all, that’s the business they’re in. However, as a tenant, you may want to enlist the services of a real estate lawyer to double-check your lease.
While this can protect you from a legal standpoint, it’s also worth remembering that a legally acceptable agreement can still be a bad business deal.
Here are the main things you should research before signing a commercial lease:
1. The Basics
When you’re looking for a new property, it’s important to investigate those features that don’t usually appear on the lease.
For example, you may want to analyze the local area to evaluate whether it’s a fit for your business. You should also look into the zoning laws to make sure your business is allowed to operate in that area.
Also, find out more about the landlord and building owner. Sometimes, these may be the same person. Either way, you’re entering a business partnership with these individual(s) and should research their financial situation and credit history.
2. The Space
Commercial properties are priced per square foot of space. However, make sure you clarify what space your landlord will charge you for. Otherwise, you could end up paying more than you expect.
This is where you need to understand some industry jargon. Your lease may mention rentable square feet (RSF), the total amount of space a tenant can lease from the landlord, or perhaps usable square feet (USF). This may include useless spaces, such as walls, elevators, and stairways.
Try to figure out what your landlord defines as rentable space as this may change from one individual to another. Many landlords use a loss factor to calculate the rentable space where, for example, they determine how big a space is and just inflate that number by a certain percentage.
You could ask an architect to measure the space and check that the usable area matches the needs of your business. If your (or your architect’s) calculations fall short of what the landlord claims to be the usable space, you could have room to negotiate the lease.
3. Operating Expenses
Your landlord may include an operating expense clause in the lease. This lets them recover the costs of running a building.
This section is often the most complicated part of a lease to understand. Ask for a premise definition of all the items that are included in the operating expenses. Then, make sure you check that these operating expenses correspond to the benefits you gain under the lease.
During your research, you may want to ask:
- What are the CAM terms? Most leases include the term CAM (Common Area Maintenance). This fee is based on the percentage of the building you’re renting. It is charged to cover any repairs or maintenance to the building’s common areas.
- Are you responsible for capital expenditures? These typically refer to any major structural expenditures where, for example, the foundations, roof, or HVAC may need work.
4. Increasing Costs
Tenants are generally responsible for any increase in building expenses and real estate taxes over some base point. This can get expensive. So, make sure you understand the ins-and-outs of any escalation formulas.
Also, most real estate taxes are the legal responsibility of the landlords, but you may be liable to pay for these if specified in the lease. Check for any real estate tax or similar clauses.
5. Changing Circumstances
If you sell your business sometime in the future, you may want someone else to take over your lease. This is known as an assignment and you may find yourself needing to assign your lease to get out of it in the future. However, your landlord may have the right to terminate your lease if you ask for an assignment. So, make sure you check if the lease is assignable.
Similar to an assignment, see if you can offer a sublease under the terms of your lease. This let another business work in your space under your lease terms. You simply pay the lease while the other party pays you a proportion of the cost.
6. Dispute Resolution
Watch out. Some leases may include a clause that states you must pay for any disputes where the landlord is taken to court.
So, check if your lease has a mandatory arbitration clause. These clauses state that both parties must settle any disputes through arbitration rather than going to court. If you do have an arbitration clause, check to make sure you have the right to help select the arbitrator and participate in other decisions during an arbitration.
Before signing a commercial lease…
Remember that no lease is set in stone. If you do your research and work with your landlord or (if needed) a legal attorney, you may be able to negotiate more favorable terms.
And if you don’t understand any aspect of your lease, don’t sign it. Make sure you get the proper professional advice.