The Importance of Understanding Your Commercial Lease
When you are starting or purchasing a business, one of the most important contracts that you will sign or assume is your commercial lease. For most business owners, the rent they pay to lease their commercial space is their largest monthly expense. Commercial leases are far more complicated than residential landlord-tenant leases, however, and there are many provisions of the lease other than rent that can greatly impact your business.
It is very important for business owners to understand the various provisions of their commercial lease. Here are some of the critical areas to pay attention to:
What is Included in the Rental Payment: The amount of the monthly rent is, of course, the central concern for the business owner with regards to their commercial lease. However, it is also important to know what that rental payment includes. For some leases, the rent payment includes some or all of the utilities, insurance, property taxes, maintenance, and other costs. With others, the tenant is responsible to pay some or all of these costs separately. Be sure you know exactly what your monthly rent includes, so you don’t run into any expensive surprises later.
What is the Term of the Lease: Another critical area of the commercial lease is its term or duration. In the commercial world, 12 months is usually the bare minimum term of the lease, and many will run for several years. Oftentimes, a landlord will offer a lower rent payment in exchange for a longer term. This may be attractive to a business owner; but be sure the term of your lease is in keeping with the current state of your business and your future goals. For example, if you believe you might need a bigger space within the next year or two, it would not make sense to sign a five-year lease at your current location.
Is Assignment and Subletting Allowed: One provision that might help provide some reassurance if you are considering getting into a long-term lease would be the ability to assign the lease to another party or sublet all or part of your space to someone else in the future. Having this flexibility allows you to more easily adapt to unexpected changes in the future. Landlords will often allow assignments and subletting as long as they are able to approve the new tenant first, and as long as the original tenant remains liable for any unpaid rent or damage done to the unit.
What Restrictions are there for the Use of Space: There are usually provisions in a commercial lease regarding what areas of the building the tenant has access to, and what activities the business is allowed to engage in within the rented space. For example, if you have a gift shop that sells souvenirs and other various merchandise, but you also want to sell ice cream and maybe some other foods, be sure this is allowed in the lease. The lease should also address the use of common areas such as the parking lot, building entrance, restrooms that are outside your unit, hallways, elevators, and stairs.
How are Disputes Resolved: If you end up in a dispute with the landlord, the lease will usually state how the dispute will be resolved. Commercial litigation is costly and time-consuming for everyone involved, so it is generally in the best interests of all parties to use some form of alternative dispute resolution (ADR). The two most common ADR options are arbitration and mediation. These two processes are similar, the main difference being that mediation is voluntary and no resolution is binding unless all parties agree to it. In many leases, arbitration is binding, meaning that the arbitrator ultimately decides the outcome of the dispute after hearing both sides.
Speak with an Experienced Business Intermediary: If you are considering purchasing a business, this is a complicated process that may be challenging to undertake on your own. There are many issues (such as the commercial lease agreement you are walking into) that you may need help with. Working with a business broker can give you the skilled guidance you need. A business intermediary can help you choose the right business to buy based on your budget, skillset, and interests, and they can save you time and money by helping you navigate the complexities of the business purchase process.