Look Before You Lease

If you plan to lease space, take precautions that will help keep your costs down, provide flexibility and enable you to grow

Leases for commercial space are normally prepared by the landlord, not by the tenant. It’s no surprise, then, that these leases heavily favor the landlord. But lease terms are not carved in stone. You can usually negotiate better terms, especially if the vacancy rate is high in your community.

The key is to take your time and study every sentence in the lease. You need to understand everything the landlord is proposing and decide if it fits your needs. If not, you can go back to the landlord with a counter-proposal. You may not get everything you’d like, but you should wind up with a more balanced lease. Here are several suggestions to help make sure you don’t get burned.

Analyze the true costs. You may be paying for more than just the basic monthly rent. For example, you may have to pay for utilities, property taxes, and insurance, or for increases in these amounts after the first year. In a multi-tenant building, you may have to pay common-area maintenance charges. These are proportionate shares of upkeep for corridors, stairways, restrooms and other facilities used by several tenants. Some leases also have a formula for increasing the rent annually based on a stated percentage or cost-of-living index. If the overall costs will break your budget, try to negotiate better terms.

Avoid giving a personal guarantee. If your business is a corporation or LLC, the lease may require you to personally guarantee payment. This puts your home, car and personal bank accounts at risk. If your business has a strong credit history, the landlord may be willing to forego a guarantee. Otherwise, see if the landlord will agree that the guarantee will vanish at the end of the first year if your business has paid the rent on time. Another option is to limit your guarantee to a stated amount, such as $3,000.

Seek assurances on parking. Many commercial buildings have on-site parking spaces. Make sure your lease gives you, your employees, and your customers the right to use those spaces. Try to include a provision that the landlord will not reduce the number of spaces available. In a multi-tenant situation, you may want to have certain spaces reserved for your exclusive use.

Lock in a renewal option. If you’re going to sign a three-year lease, you may want the option to renew for one or more three-year terms if everything works out. The landlord may agree, but may expect a higher rent in any renewal period. That’s fine, but be careful to specify what the new rent will be, or how it will be determined. Don’t leave this open-ended. If the lease simply says that you and the landlord will negotiate the new rent later on, you may wind up in a lawsuit if the two of you can’t agree on what’s fair.

Preserve your right to sublease the space. This can be helpful in the future if you want to move to a bigger or smaller space, or if you want to close or sell your business. The lease may say that you can sublease your space, but only with the landlord’s consent. In that case, have the landlord agree not to withhold consent unreasonably.

Plan ahead for early termination. You never know what the future holds. You may find that you need to move out before the lease ends. If your lease is silent on the subject, your business — and you, if you sign a guarantee — will owe rent for the rest of the lease. (You will, however, get credit for any rent paid by a new tenant.) One way to limit your liability is for the lease to say you can pay a move-out fee, such as three months’ additional rent, and be free from any further obligation.

Seek move-in concessions. When commercial space is plentiful, the landlord may be willing to waive rent for the first few months, build out the space to your specifications, or provide improvements such as new lighting or flooring.

Reserve the right to add space. In a multi-tenant building, see if the landlord will give you first dibs if an adjoining space becomes available. That way, if your business has a growth spurt, you’ll have space to expand.

Be clear on maintenance responsibilities. Maintenance and repairs can be expensive. Who pays — you or the landlord — if the air conditioning fails, or if a water pipe bursts? Your lease should speak clearly on this subject. You need to know how big your financial exposure is. If you’ll be on the hook for major repairs, have a qualified contractor inspect the premises before you sign up and make sure the major building systems are in sound condition.



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