So you’ve gotten a sweetheart deal on a new commercial space for your business, your financing is all set and the lease is ready for your final signature. You’re good to go, right?. Not quite. A commercial lease can seem great when you’re talking to the landlord or a broker, but it’s always best to take a step back, ask some questions and review the language of the document. You never know what’s hiding in the fine print and what you may be overlooking.
Taking a Look at Yourself and Your Business
The first evaluation that any business owner needs to make before singing a lease is an evaluation of themselves and their business. This extends from making sure there’s an adequate business structure in place to evaluating what type and size of space the business needs to deciding whether the business will generate enough financing to fund the lease rental payments and the business. This also includes deciding whether the owner is willing to personally put their assets on the line since many commercial leases require a personal guarantee.
If you’re just starting a business, have you properly formed the business, and do you have all of your legal documents in place? Every business needs to be legally able to do business in each state in which it operates. For most states, this means filing an entity in the state in which it is doing business. It’s also a good idea to have legal documents in place. This can mean an operating agreement, a shareholder’s agreement, resolutions, etc., depending on the entity type.
Have you fully evaluated what your business needs and what it can afford? This can include evaluating where your business needs to, or should, be located, thinking about how many employees will be needed, projecting potential timing and size of future growth potential and most importantly, thinking about what your business can afford. These are all important to think about before signing a lease, and even before looking for a potential rental space altogether, as these factors will help you determine the right size, location and budget.
Are you ready to potentially lose your assets if the business fails? Many commercial leases require personal guarantees, usually depending on the size and location of the potential space. A personal guarantee means you’re guaranteeing payment of all amounts due under the lease with your own personal assets, unless you can get someone else to guarantee the lease for you. Your personal finances may also not be enough for a landlord, and you may have to seek out other persons to personally guarantee the lease for you. This brings an entirely new element into the picture as these third person personal guarantors usually require giving up business ownership or the payment of fees.
Did You Get the Terms You Want or Need
Take a step back and think about the negotiation process. Did you negotiate the best deal possible? Did you enter into a triple net lease? Do you known what that means? Are you or the landlord paying for repairs? These are important questions to ask yourself about your negotiation process when entering into a commercial lease.
Even if you’ve reached the lease stage, the negotiation is not over. Many terms are often still unresolved at the initial lease draft stage as not everything can be covered by initial negotiations and letters of intent. The details are often still open for negotiation. There are also some standard lease provisions that are not often contemplated before the actual lease draft stage. Take your time reviewing the lease, think about what additional terms you would like, or which terms you’d like to remove, and above all make sure the terms you agreed to are included exactly as discussed. Just because there’s a draft lease doesn’t mean the negotiating is over. Mae sure the lease fits you and your business and is not grossly unfair to you. If it’s written by the landlord or the landlord’s attorney, it was most likely drafted to be in favor of the landlord, if not heavily in favor of the landlord.
Most leases are triple net leases. This means that you not only pay the rent, you also pay property taxes and other expenses used to keep the property running (electrical, landscaping, utility, etc.). The lease may be general or specific as to what expenses you will be paying for and whether there will be a cap on some or all of these expenses. You may even have negotiated a cap on expenses or for the exclusion of certain expenses. The lease may explain such items as whether these expenses are allocated to you on a pro rata basis, whether or not you may be responsible for paying expenses for a vacant space and when you will be responsible for paying the property taxes (i.e. ahead of time or after the property taxes have been assessed). Don’t get tricked into paying for more than you should.
What repairs and improvements that you are obligated to pay for vary with the terms of the lease. Some leases require only that a tenant pay for repairs and improvements that they cause, others require the tenant pay for all repairs and improvements and others exclude structural repairs and improvements. There are also a variety of other ways that leases can be drafted to allocate obligations when it comes to paying for repairs and improvements. It’s important to closely evaluate the lease to check for how these expenses are going to be paid and who will be obligated to pay for them.
Final Evaluation of the Lease
The most important thing when entering into a commercial lease is to make sure you fully review and understand the lease and its terms. Even if you have hired an attorney, review the lease in full yourself. You may know things about the business that the attorney may not contemplate that could be affected by a term in the lease.
Check for final items that may be important to your business at a later date For instance, is there a possibility that you will assign the lease or sublease the lease later? Commercial lease agreements often completely prevent the assignment or sublease of a lease, or at a minimum require a landlord’s written consent. Does the lease have an arbitration, negotiation and/or mediation provision? These can often be detailed or general with requirements as to how the procedure will take place, who will select the arbitrator or mediator and where the mediation, negotiation or arbitration will take place. You don’t want to be required to travel far away in the event negotiation, mediation or arbitration is needed, and you definitely don’t want to enter into a lease where the landlord gets to pick the mediator or arbitrator without you.
Finally, are you really ready to enter into the lease? Is your financing in order? Have you considered all of the things in this article, and more? An attorney is recommended to help you make these determinations, and to review and negotiate the lease on your behalf, especially if the landlord is an attorney or has an attorney of their own. If you are seeking such an attorney please give Dodson Legal Group a call for a consultation at 844-4DODSON.