by Robby Pinnamaneni
Leasing does not have to be a daunting process; however, it is not something to be taken lightly. Commercial leases have many components, many of which have an effect on your bottom line. Thus, the biggest takeaway is that your business’s profitability and ultimate survival is directly tied to your commercial lease terms.
A common (and costly) misconception is that commercial leases are similar to residential leases. Commercial leases differ from residential leases in several ways:
(1) commercial leases are generally long-term leases that are tailored to the tenant’s specific business use; thus, they are harder to terminate and often require larger sums of money (up front) including personal guaranties;
(2) there are fewer laws protecting the commercial tenant because the idea is that both parties are sophisticated and can freely negotiate informed lease terms with the assistance of an attorney; and
(3) commercial leases are subject to more negotiation (and liability) for both parties due to the many lease obligations that both parties take on.
To adequately protect yourself you must consider a variety of commercial lease terms, including:
- The length of lease as well as any renewal options and the specific terms of such renewals;
- Rent, including common area expenses, percentage rent, escalations in rent over the lease term, and any other tax or insurance obligations that may be allocated among both parties;
- Exactly what space you are renting and how the landlord measures the space (which is often used in calculating a tenant’s allocation of common expenses);
- Insurance and tax consequences;
- Tenant revenue or gross profit requirements;
- Percentage rent issues;
- Indemnification provisions (one party waiving the other party’s liability for certain acts or occurrences);
- Exclusivity provisions that limit a tenant’s use of the premises or sale of certain items;
- Agreed use (or permitted use) of the premises, although seemingly benign, can severely inhibit a tenant’s use of the premises or sale of certain items;
- Whether there will be improvements, modifications or fixtures added to the space, including how the cost of such items is allocated and ultimate ownership after termination of the lease;
- Personal guaranty which makes a tenant personally liable for any defaults under the lease;
- Signage requirements (and limitations);
- Allocation of maintenance obligations for internal and external structures;
- Whether the lease may be assigned or subleased to another tenant;
- If and how the lease may be terminated, including notice requirements, and whether there are penalties for early termination;
- Hazardous substances (environmental issues etc.), including allocation of liability due to the presence of any hazardous substances; and
- Zoning and Americans with Disabilities Act compliance.
As you can see, the list above, although not exhaustive, presents many moving components that must be carefully evaluated in conjunction with each other. We have handled the negotiation and drafting of many commercial leases in a variety of industries. If you are evaluating entering into a commercial lease and/or have any specific questions, please do not hesitate to contact us at [email protected].