What to do Before Signing a Commercial Lease

You’ve found the perfect location for your business, and you may want to lease it fast before it’s gone. However, you should slow down a bit and take the time to consider the lease carefully. You and your business will have to live within the commercial lease requirements of the agreement for years to come, and the wrong conditions could be detrimental to your business. You need to negotiate for the terms that will help you succeed.

What to Look for When Signing a Commercial Lease

First, you need to read and understand the entire lease. Ask questions about anything you don’t understand. Dig deep into the repercussions of each term, especially if they vary from typical commercial lease requirements. Understand it thoroughly, then make a list of each condition that you don’t like. Give the list to the landlord as points for negotiation later.

Next, understand how the lease terms will affect the operation of your business. Could unexpected expenses cripple you at the wrong moment? Carefully consider all costs and conditions and how they will affect your business. Look for hidden expenses.

If you are starting a business, it is vitally important to have your business structure and legal protections in place before you sign anything, including your lease. This way, you are protected.

What Kind of Lease is Offered?

Are you considering a gross lease where all costs are detailed upfront and do not vary from month to month? Or a net lease where you could end up with unexpected expenses from month to month. Both have advantages when carefully negotiated, but many inexperienced renters do not understand the terms well enough. Get help, if needed, until you know every part of the lease and its effect on your business.

You’re probably working with a lease form provided by the landlord or his lawyer. Typical commercial lease terms favor the landlord’s interests. It is probably not in your best interests, so you need to read it carefully and then negotiate for changes that protect your business.

Additionally, pay attention to the condition of the property, the neighborhood, the zoning regulations, and nuisance laws. Is the community changing? Does your business fit into the community as it currently is? If the area is changing, is your business a good fit with the current trend?

Do You Need a Solicitor to Sign a Commercial Lease?

Whether you need a lawyer is a complicated question that depends on your business situation and the lease terms. If you are negotiating a straight-forward short-term lease with typical commercial lease terms, you probably don’t need a lawyer. However, if you are arranging a long-term contract with complicated terms, it is advantageous to get legal advice.

In complicated situations, good lawyers pay for themselves. They will help you save hundreds or even thousands over the life of the lease. Consider whether hiring a lawyer will help you negotiate better terms, especially if the landlord is a tough negotiator. Hiring a lawyer indicates that you are serious about the negotiations and the commercial lease requirements.

However, for many leases, a commercial real estate broker who works for you can help with the negotiations. A real estate broker cannot give legal advice, but they know commercial leases inside and out. They can explain terms, tell you what is standard, and how the conditions will affect your business. Since commercial real estate brokers earn fees by the commission, a good broker can save you money over the cost of a lawyer.

Whether you choose to hire a lawyer or not, have someone look over the lease for you and advise you on the terms and expenses. An experienced advisor can protect you from situations and conditions that unnecessarily favor the landlord.

Negotiating Before Signing the Lease

The negotiations usually start with typical commercial lease terms that strongly favor the landlord. Since they wrote it, it contains everything they want and probably little that you want. Your goal is to change the situation to one that favors you or at least gives you the terms you need for your business to prosper.

Your landlord will probably say that they are offering a “standard” commercial lease. Understand that there is no such thing as a “standard” lease. Every lease can be improved. Your landlord’s ability to negotiate is only restrained by promises made to other tenants and obligations to lenders, insurers, and local laws.

How successful your negotiations are depend on how badly the landlord wants to rent to you and how tight the market currently is. It may also depend on how much time the landlord wants to spend on managing the property. If your offer meets their goals, it is likely to be accepted. Knowing a little about the property, the owner, the current commercial real estate market, and the lease terms can help you negotiate favorable terms.

When negotiating, cover all the terms, including the CAM terms. Understand how your CAM fees are determined and what kind of documentation will be provided. Also, put a cap on how much CAM fees can increase year-to-year.

Essential Questions to Ask Before Signing

Unfortunately, the little things can sometimes make or break a deal. Sometimes what is not included can be very important. For this reason, it is vital to have the lease reviewed by a knowledgeable professional such as a commercial real estate broker or a lawyer. A knowledgeable professional can help you understand the hidden pitfalls and point out where you are vulnerable. You need this knowledge to calculate the risk and reward on any property accurately.

Additionally, make sure you understand all the commercial lease requirements and ask questions. Here are just a few of the questions you need to consider before signing a lease:

• Is the lease assignable in the event your business is sold? And can it be subleased?
• Is there an arbitration clause? Do you have a say in choosing the arbitrator?
• Is a personal guarantee required? Can it be limited to a short time period?
• Do you understand the CAM terms? Will documentation be provided for expenses?
• Are you paying for the landlord's marketing costs and legal fees in your CAM fees?
• Does the lease include a reasonable break clause?
• Does your insurance coverage meet the lease requirements?
• Is insurance required before moving in?
• What is your responsibility for capital expenditures?
• Can the landlord insist on changes or improvements you didn’t plan for or expect?
• Is there room for expansion? Can you move to a larger space in the same building if it becomes available?
• What happens if a fire, flood, or other disaster makes your space unusable?
• What happens if access or visibility of your space is restricted by construction or other changes to the building?
• What are the traffic and current demographics?
• What is the parking situation for employees and customers?
• Can you add a non-compete clause so that no similar business can open in the building?
• Do you need a business license, certificate of occupancy, or a building permit? What happens if you can’t secure the necessary documents?
• Under what conditions can you break the lease? What happens if an anchor tenant leaves the building and traffic drops significantly?

Whether you are a seasoned business owner or looking for your first commercial location, you can’t be too careful when choosing a property and signing a lease. Your lease terms will affect your business for years, so take your time and negotiate carefully to get the best conditions. Don’t be afraid to ask for help if you need it. A good lease agreement can be the start of a successful business. Contact us to learn more about commercial lease types and which is best for you.