OBERMAN LAW FIRM
Understanding Commercial Leases
By Stuart J. Oberman
Once you decide to start your own business, or move your office from your home to a commercial office, it is important that you understand the basic facts about a commercial lease.
Renting commercial space is a big responsibility, and the success or failure of your business may depend upon certain terms of the lease. Before you approach a landlord, you should understand how commercial leases differ from a residential lease.
Commercial Lease vs. Residential Lease
It is crucial to understand that a commercial lease and a residential lease are quite different. Some of the biggest distinctions are outlined below:
Fewer consumer protection laws. Commercial leases are not subject to most consumer protection laws that govern residential leases.
Commercial leases are not subject to most consumer protection laws that govern residential leases.No standard forms. Many commercial leases are not based on a standard form or agreement. Most commercial leases are customized to fit the landlord's needs. As a result, you should throughly examine every commercial lease agreement that is offered to you.
Many commercial leases are not based on a standard form or agreement. Most commercial leases are customized to fit the landlord's needs. As a result, you should throughly examine every commercial lease agreement that is offered to you.Long-term and binding. It is extremely difficult to break or change a commercial lease. It is a legally binding contract, and a good deal of money is usually at stake.
It is extremely difficult to break or change a commercial lease. It is a legally binding contract, and a good deal of money is usually at stake.Negotiability and flexibility. Commercial leases are generally subject to much more negotiation between the business owner and the landlord. Since a business may need special features for their office space, and since landlords are often eager for tenants, many landlord’s are flexible and willing to be accommodating.
Commercial leases are generally subject to much more negotiation between the business owner and the landlord. Since a business may need special features for their office space, and since landlords are often eager for tenants, many landlord’s are flexible and willing to be accommodating.Meeting Your Business Needs: Before you sign a lease agreement, you should make sure the lease will meet your business needs.
First, consider the amount of rent you can afford and the length of the lease. You probably do not want to commit to a five or ten year lease. A short-term lease with renewal options is usually safer [your business may grow faster than expected and the location may not be right].
Also think about the physical space. If your business requires modifications to the existing space, [i.e., adding cubicles, raising a loading dock, or rewiring for better communications] make sure that you (or the landlord) will be able to make the necessary changes.
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Checklist: Critical Lease Terms: The following checklist is a list of items that are often addressed in a commercial lease [pay close attention to these items]: |
-the length of the lease and renewal options
-the rent, including allowable increases (also called escalations), and the method of computation
[Example: whether the rent you pay includes insurance, property taxes and maintenance costs
which is called a gross lease or whether you will be charged for these items separately which is called a net lease].
-the security deposit and conditions for its return
-exactly what space you are renting (including common areas such as hallways, rest rooms and elevators), and how the landlord measures the space (some measurement practices include the thickness of the walls)
-whether there will be improvements, modifications (called build outs) or fixtures added to the space, and who will pay for the improvements; and who will own the improvements after the lease ends (generally, the landlord does)
-specifications for signs, including where you may put a sign and the size of the sign
-who will maintain and repair the premises, including the heating and air conditioning systems
-whether the lease may be assigned or subleased to another party
-whether there is an option to renew the lease or expand the space [right of first refusal]
-how the lease may be terminated, including notice requirements, and whether there are -penalties for early termination
-whether disputes must be mediated or arbitrated as an alternative to court.
There are many items that must be addressed in every lease and it is important to remember that every business owner has different needs. Before you sign a lease, make sure your decision is well thought out, because your future may depend on it.
