How to Evaluate a Commercial Property Lease
You’ve finally found the perfect location for your new business. Before you sign a lease, remember that no matter now friendly your prospective landlord seems, the lease is not likely to be in your favor. Here are some important points to consider before signing a commercial lease.
After you’ve found a location for your brick-and-mortar store, next comes the negotiation and signing of one of the most dreaded legal documents any entrepreneur will ever face: the commercial lease (insert scary music here).
Before we dive in, understand these points: There’s no such thing as a lease that’s in favor of the tenant. Trying to break a lease is like trying to sweet-talk your way out of Alcatraz. Landlords are your best friends until you miss a rent payment or two.
Chances are that when you find your perfect space, the landlord will just happen to have a lease in his back pocket that “all his tenants have signed without a problem.” Chances are he’ll hold the lease with one hand and a pen filled with your blood in the other. Chances are he’s banking on you signing the lease without bothering to read it, which many of his tenants have probably done in the past. I hope the chances are you’re much too smart to do so.
I don’t care how many people he says are lined up to rent the space, you should take the lease home and take all the time you need to review it thoroughly before putting your name on the dotted line. Trust me — if the space was that hot, it would be rented already, so don’t let anyone pressure you into acting too quickly.
Even if you read every word of the lease yourself, have an attorney give it a second look because a lease is a legal document and, as such, is written in a language mere mortals rarely understand.
Forget reading the fine print. When it comes to a lease, it’s ALL fine print, and you should always get a more experienced pair of eyes to go over the details.
Here are a few other things to consider before signing a lease.
How is the monthly lease payment calculated?
The most basic equation for calculating a lease payment takes the number of square feet times the cost per square foot, then amortizes that over a 12-month span. For example, if you have 1,000 square feet and the cost per square foot is $12, the annual lease amount would be $12,000. Divided by 12 months the monthly lease payment would be $1,000. Again, this is a simplified scenario. These days most commercial leases include additional factors that affect the final price, such as a monthly percentage of your gross sales, property tax, rent increases, operating expense escalations, common area charges, etc.
Who is responsible for paying what?
It’s important that you understand exactly what you are paying for and what expenses the landlord will cover. Are you responsible for any costs other than the rent? Are you responsible for paying for your own utilities and garbage pickup, for example? Will you have to pay for window washing and janitorial services? Who pays for repairs if the air conditioner goes on the fritz? Chances are you do. It’s good to understand that ahead of time.
Can the monthly payment go up at any time?
It’s typical for a lease to contain what’s known as an “escalation clause” that allows the landlord to pass on increased building operating expenses to the tenants. If your lease contains such a clause, you should ask for a cap on the amount the lease payment may rise over a given period of time and an accounting of the items that are forcing the increase.
Will my rent increase every year?
One very important factor to know is if, when, and by how much your rent might go up over the term of the lease. It’s expected that rents will increase as property values increase, so most leases include a rent increase on the anniversary date of the lease.
Plus, if your landlord can rent the space for more than you agreed to pay a year ago, they’re within their rights to ask for the increase. However, it would be a nightmare if your rent suddenly doubled. You should negotiate the timelines and amounts of increases before you sign the lease. If your landlord balks at this, find another space.
Is a personal guarantee required?
What happens if your business goes south and you can no longer afford to make the lease payment? Are you responsible for paying the rent out of your own pocket? Probably so. Most landlords insist on a personal guarantee from the owner or an officer of the corporation. This means that even if you go out of business, you’re still on the hook for the remainder of the monies owed.
Finally, be clear on every point in the lease
And if you’re not clear on every point, get clarification from your attorney. Exactly how much space are you leasing? What day of the month is the rent due, and what’s the extra fee if you’re late? Who’s responsible for repairs? What common areas will you have access to? Who’s responsible for maintaining things like keeping the shared restrooms stocked with soap, towels, and, most importantly, toilet paper?
A small detail to consider, except when you suddenly find yourself without such amenities at the wrong time.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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