Are you considering leasing office or retail space for your small business? The terms of your lease can have a huge impact on whether your business succeeds or fails. There are several important provisions that should be considered before you sign on the dotted line.
Leases of a certain duration (usually one to three years, depending upon the state) are generally required to be in writing and signed by the party against which they are being enforced. In reality, it is advisable for all commercial leases to be in writing, regardless of their duration. They should clearly spell out certain terms that are of crucial importance, including the following:
(1) The leased space. Your lease should state exactly what space you are renting, including common areas such as hallways, restrooms, stairs, and elevators. The square footage of the space and how it was measured should be specified.
(2) Modifications to the property. If you need to make improvements or modifications to the leased space for it to work for your business, this should be spelled out in the lease. In addition, the lease should indicate who will pay for the improvements and who will own them at the termination of the lease.
If modifications must be made for the building to comply with the Americans with Disabilities Act, the lease should specify which party is responsible for implementing and paying for those modifications.
(3) Length of the lease. At first thought, a longer lease term of five or ten years may seem advantageous because it would guarantee that you will not be forced to move your business to another commercial space. However, it also binds you to a space your business may outgrow or that you find to be unsuitable for your customers or employees. For many businesses, especially new ones, a shorter lease term with an option to renew is more beneficial, as it will afford you more flexibility and impose less financial risk. However, if you plan to make a substantial amount of improvements to the leased premises, you should consider the pros and cons of a long-term lease to enable you to recoup the amounts you have invested.
(4) Rent. Obviously, you should make sure your business can afford to pay the monthly rent set forth in the lease. The lease should state not only the amount of the rent, but also how it is to be paid and what it includes: Does it include other charges associated with the property such as taxes, utilities, insurance, maintenance, and water, or is the landlord responsible for those expenses?
Commercial leases also often contain escalation clauses allowing the landlord to increase the rent by a certain percentage at specific intervals (for example, 3% per year) during the term of the lease. It is important to understand how the escalations are calculated and verify that they are acceptable for your business.
If the commercial space is damaged during the lease term, a rent abatement clause can limit your business’s risk by halting or reducing rent payments until damage is repaired. Some landlords try to create exceptions to rent abatement clauses when the damage is caused by the tenant or the tenant’s employee, but these exceptions should be avoided.
(5) Use. Ensure that you include terms specifying that the commercial space may be used for the type of business you intend to run. Further, make sure there are no restrictions on the use of the property that would be an impediment to your business. If you intend to display a sign, use the sidewalk in front of the space, or play music, you should include provisions to that effect in the lease.
(6) Competition. If you think your business could be harmed if similar competing businesses are located nearby, include a provision restricting the landlord from leasing commercial space to those businesses in the surrounding area.
(7) Subletting or Assignment. A clause allowing you to sublet or assign your lease will give your business more flexibility by allowing you to sublet all or part of the commercial space to another tenant should you decide to change locations or include the lease in a sale of the business at some point in the future.
(8) Termination. An early termination clause specifies certain conditions under which the lease can be terminated early by the landlord, the tenant, or both parties. This type of clause can be beneficial, particularly in the case of a longer term lease, because it allows you to avoid penalties or litigation if, for example, you are forced to close your business.
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As business attorneys, we understand the importance of your commercial lease to the success of your business. If you are considering moving into a new commercial space, we would be happy to help you negotiate lease terms favorable to your business. We invite you to contact us to set up a consultation.