Navigating the complexities of a commercial lease can be daunting. To help you make informed decisions and secure the best terms for your small business or practice, here is a guide on important provisions to look for in a commercial lease.
1. Lease Term and Renewal Options
- Duration: Ensure the lease term aligns with your business plan as well as any lender requirements. If you have a loan for 10 years, your lender will want to ensure you can stay in the property for 10 years, but this doesn’t mean your lease needs to be a 10-year lease term. You can negotiate a shorter lease term with renewal options. Short-term leases offer flexibility, while long-term leases provide stability.
- Renewal Options: Check for options to renew the lease and the conditions for renewal. This ensures you have the opportunity to continue operating in the same location on the same lease terms, if desired.
2. Rent and Rent Increases
- Base Rent: Understand the base rent amount and how it compares to similar properties in the area.
- Escalation Clauses: Look for clauses that specify rent increases. These can be based on fixed percentages, cost-of-living adjustments, or other factors. A 3% annual increase is typical.
3. Operating Expenses and “Additional Rent”
- Common Area Maintenance (CAM): If the lease is a triple net lease (NNN), identify what CAM charges or “additional rent” will be charged and how those charges are calculated. Ensure there is a cap on CAM expenses to avoid unexpected costs. It’s always best to ask for the last two years of CAM expenses and additional rent to get an idea of how much more per month you will be expected to pay.
- Utilities, Insurance, and Taxes: Determine who is responsible for utilities, insurance, property taxes, and other operating expenses.
4. Exclusivity Clauses
- Exclusivity Clause: Negotiate for an exclusivity clause to prevent the landlord from leasing adjacent spaces to direct competitors.
5. Maintenance and Repairs
- Landlord's Responsibilities: Identify which maintenance and repair tasks are the landlord's responsibility. You will almost always the maintenance and repair of any structural components and replacement of HVAC systems to be the landlord’s responsibility as those repairs can be costly.
- Tenant's Responsibilities: Understand what repairs and maintenance tasks you are responsible for and any associated costs. It’s typical for tenant’s to be responsible to repair anything inside the leased premises, but you will want to negotiate who will be responsible for building systems such as HVAC, electricity, and plumbing.
6. Subleasing and Assignment
- Subleasing Rights: Check if the lease allows you to sublease the space to another tenant. This can provide flexibility if your business needs change.
- Assignment Rights: Ensure you can assign the lease to another party if you sell your business or relocate. Also, you will need to know if you will be responsible for any costs associated with an assignment, such as the landlord’s attorney fees.
7. Termination and Default Clauses
- Termination Clause: Look for conditions under which you or the landlord can terminate the lease early. It is rare for a tenant to be able to terminate early, so this may be something you need to negotiate with the landlord.
- Default Clause: Understand the consequences of defaulting on the lease and the remedies available to both parties.
As an attorney, I recommend negotiating terms that align with your business goals and provide both flexibility and stability. Don't hesitate to seek professional advice to ensure your lease agreement serves your best interests. With the right knowledge and preparation, you can confidently enter into a lease that supports your business's growth and success. As always, please feel free to reach out with any questions you may have about your business' lease!
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