Persons that have their own businesses, like all businesses, need a workspace from which to carry out their business activities. When faced with obtaining commercial space, business owners have the choice between buying and leasing. Since buying is often more expensive than leasing in the short term, many owners choose leasing.
Having decided to lease, many owners inexperienced in the area of commercial leases assume that this type of lease works similarly to residential leases. However, there are many important differences between the two types. If the commercial lease is poorly negotiated, it can actually mean the difference between the success and failure of the business.
Four main differences
Commercial leases differ from their residential counterparts in four major ways:
• Longer Term: Many commercial leases can last for five or ten years. However, unlike residential leases, commercial tenants cannot easily break the lease, which can potentially obligate the tenant for a significant amount of money for years to come.
• Fewer protections: Commercial leases do not enjoy the same protections that residential leases do, such as consumer protection laws. As a result, there are fewer rules governing what is allowable in the terms of the lease (e.g. no rules about security deposit caps or tenant’s right to privacy).
• No forms: Most commercial leases are unique and conform to the landlord’s needs, rather than a standard form agreement. Because of this, it is very important to closely scrutinize the lease before signing.
• More flexible: Unlike residential leases, where there is little flexibility in most cases, commercial leases allow for a great deal of negotiation between the landlord and tenant.
Making sure the lease fits the business
To avoid future landlord-tenant disputes, before a commercial lease is signed, it is important for business owners to carefully examine its terms to ensure that they fit the needs of their business. Probably the main term to look out for is rent. It is important to ensure that the amount of rent for the term offered, including any increases during the term, is affordable. In general, it is better not to sign a longer lease, even if it is less expensive . The business may grow more (or not do as well) than anticipated in the interim, making the space no longer suitable (or needed). As a result, it is advisable to consider a shorter lease with an option to renew.
Other important terms to consider in the lease include:
• The terms of the security deposit and what must be done to have it returned
• Whether the rent includes taxes, insurance and maintenance costs
• Whether the lease allows modifications to the physical space to suit the needs of the business
• Who will pay for the maintenance of the premises, such as the heating or air conditioning
• Whether signs for the business are allowable and where they may be located
• Whether the lease may be assigned or subleased to another tenant if the business does not work out
• If and how the lease may be terminated and whether there are any notice requirements or early termination penalties
• Who will pay for any modifications to the premises required by law (e.g. Americans with Disabilities Act)
Speak to an attorney
Failure to negotiate a commercial lease that takes into account the needs of the business can cause the business to be on the hook for significant financial obligations, which can potentially cause it to fail. The attorneys at Dunn Lambert, LLC are experienced with all aspects of the law affecting businesses, both large and small, and can assist owners throughout the lease negotiating process, ensuring that pitfalls are avoided and the lease reflects the best interests of the business.