Signing a lease can be an exciting but risky time for a small business. The terms of a lease can play a significant role in determining the future of a small business.
Business commercial leases vary widely, so you should always have a legal expert review the contract before signing it. Be sure you understand the specifics of the lease and can meet the requirements set forth by the landlord.
Here are some factors to consider when negotiating a lease:
What are the types of leases?
Gross Lease: includes all costs incurred during the period of the lease.
Net Lease: requires the rent payment plus additional amounts.
Triple Net Lease: requires the rent plus a share of the property’s real estate taxes, insurance costs and maintenance costs.
Percentage Lease: requires that the business pay a percentage of their profit to the landlord.
What are the Common Area Maintenance (CAM) charges and what do they cover?
Understanding CAM charges and how they apply to your lease is critical. CAM charges may include snow removal, security, a parking attendant, building maintenance, building management fees and other charges.
Who is responsible for the build-out of the space?
A landlord may make an investment in a build-out of the space to make it most suitable for your business. This should be negotiated into the lease, clearly specifying which elements of the build-out they will pay for. You and your landlord should agree on clear specifics on the features of the space upfront. This will reduce the likelihood you’ll have to make changes to the space that can delay your timeline for move-in.
When do the rent payments start?
Some leases specify that rent payments start on the first day of the first month after the lease is signed. Others specify that payment is due when the build-out phase is complete. Others provide several months of free rent to allow the business to get established in the location. The latter arrangement can be a “win” for you and your landlord, giving your company a better chance at long-term success.
What is allowed and who is responsible for various aspects of the unit?
Make sure it is clearly explained who is responsible for aspects of the space such as HVAC, foundation, walls, plumbing, and common areas. You may be responsible for all interior aspects of the space and the landlord is responsible for the exterior or some variation. This should be spelled out in the lease.
Have a building inspector examine the space before signing the lease can help avoid unexpected maintenance costs. Conducting your due diligence in advance can help you avoid expensive surprises later.
Be sure that the lease addresses what is allowed in the space, including rights to signage in a plaza, restrictions on your storefront signage and regulations over the activities that your business will do in the space.
What are some of the other legal aspects of the lease?
Renewal options. Be sure you understand the length of the lease and the options for renewal. This will help you avoid a situation where the landlord raises your rent after the initial term after you’ve built a successful business there. Also address whether you are able to sublease the space.
Anchor businesses. You may want to try tying the terms of your lease with the lease of an anchor business in the plaza. For example, if a large grocery store is driving potential customers to your location and goes out of business, it may negatively impact your business. Tying your lease to theirs may allow you to get out of your lease if they leave.
Guarantees. The landlord may prefer to have a personal guarantee and/or a co-signer for the lease. Make sure to consult with legal professionals to help make this difficult decision.
What is the process of negotiating the lease with the landlord?
When you sign a lease, you will likely be tied to the space and the landlord for a few years. The lease negotiations will likely offer insight into how your working relationship with the landlord will develop.
Early on, the landlord may not feel that you’re serious about renting the space. A letter of intent can be used to show the landlord you’re ready to negotiate. A legal professional can provide insight into whether to use a letter of intent to get the negotiation process started.
What leverage do you have in the negotiation?
The negotiation process is all about leverage. If the landlord has a prime location with other interested potential occupants it may be difficult to negotiate effectively. However, if the space is beneficial to your business but not under great demand by other businesses, you may be able to get better terms. Having other successful locations may make the landlord view you as a safer tenant than a first-time business owner.