If you are a starting a new business that requires you to either lease office space or open a physical store where you can visit with customers, chances are you will be signing a commercial lease. Before you engage in the process of selecting a viable location that meets your needs, it is a good idea to retain the services of a commercial real estate broker that specializes in representing the interests of tenants (often referred to as a "tenant rep"). Tenant reps are typically familiar with the available properties in your geographic location and have a firm grasp on the fair market rent for varying property types. Best of all, tenant reps are paid a commission by the landlord; so, essentially you get to avail yourself of the knowledge and skill of your tenant rep without cost. Even though, many tenant reps are knowledgeable in handling the lease negotiations with the landlord on your behalf, it is still extremely important to have a real estate attorney review and amend, if necessary, the proposed lease in order to insure that your interests are protected. On a side note, I have spoken with many tenant reps that have told me they always suggest to their clients that they retain the services of an attorney-beware of any tenant reps that advise otherwise.
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This article will briefly discuss some key provisions of a commercial lease that are important for tenants to review and understand before committing to any lease.
1. Basic Lease Information- Many commercial leases will have a few summary pages in the beginning, which may be referred to as "Basic Lease Information", "Lease Information" or other similar name. These pages serve as a quick reference of the key terms of the lease such as: rent amount, address of landlord and tenant, term, security deposit amount, square footage of area leased, option period, etc. It is important to understand the actual start date of the lease--some leases may refer to this date as the "Rent Commencement Date" or "Lease Commencement Date". If the space requires either the landlord or tenant to build-out the space to fit the tenant's business needs then the actual start date of the lease will probably be a certain defined period that is related to the completion or substantial completion of the construction to be performed.
2. Alterations, Fixtures, Improvements- Most leases will prohibit the tenant from making any alterations or improvements to the interior and exterior of the property without prior approval form the landlord. Tenants should also be aware that the landlord will deem as fixtures any items or alterations that are affixed to the property, which are surrendered upon the termination of the lease. If you are tenant, you want to insure that any trade fixtures installed remain your property and may be removed upon vacating the property. Trade fixtures are equipment that a tenant specifically installs for the operation of his/her business. Since trade fixtures can be expensive, you want the ability to take all equipment with you when your lease is up.
3. Assignment and Subletting- Leases almost always require that the landlord give prior approval before the leased space can be assigned or subletted to a third party. If you are a tenant attempting to assign or sublet your space, it is essential that you read the language of your lease very carefully-typically, the lease states that the tenant is still fully liable for all rents even if the property is assigned/subletted to another party.
4. Condemnation- Condemnation deals with a governmental entity acquiring ownership of the property. Some leases state that if all or any portion of the property is taken by condemnation, then the lease automatically terminates. Other leases provide that the tenant may remain in the property if only a portion was taken by condemnation, and the tenant is still able to utilize the remaining space without interruption in the tenant's normal business operations.
5. Defaults and Remedies- This provision of the lease is extremely important. It sets forth specific conduct or actions on the part of the tenant that trigger a default under the lease. Some examples include: failure to pay rent, the filing of a mechanic's lien against the property as a result of tenant's failure to pay for work performed, abandonment of the property by tenant, filing a petition in bankruptcy, failure to pay all required taxes, etc. The landlord's remedies in the event of a default are also clearly defined. Tenants should pay special attention to a "Confession of Judgment" clause. In some states, a Confession of Judgment clause permits the landlord to go to court in the event of tenant's default and obtain a judgment of possession to take back the property without any prior notice to tenant. This essentially speeds up the process for the landlord to regain control of the property if the tenant has defaulted under the lease.
6. Attornment and Subordination - In this provision, the tenant agrees that the lease and all of tenant's rights under the lease are subordinate to the rights of any mortgage, deed of trust or other security instrument constituting a mortgage upon the property. If a mortgagee (such as a bank or other lender) comes into possession of or acquires title to the property, the tenant agrees to "attorn to" or essentially recognize the mortgagee as the new landlord. Under this scenario, all terms and conditions of the lease remain in effect.
7. Additional Rent for Taxes, Common Area Maintenance and Insurance- Most commercial leases require tenants to cover additional expenditures associated with the property, and classify these costs as "additional rent". Tenants should pay particular attention to these expenses in calculating monthly and yearly payments owed to the landlord. It is quite common for landlords to require that a tenant pays for a portion of the real estate taxes on the property, the costs of maintaining the common areas (hallways, stairways, elevators, lobbies, bathrooms, parking lots, etc.) and the commercial liability/property coverage insurance on the building.
While commercial leasing seems standardized to residential leasing, you'll be able to be certain that your college apartment lease did not prepare you for what lies ahead. You would like to recognize the do's and don't from leasing prior to you hitting the streets in exploring a new location for your business.
Commercial Leasing Do's
Shop Around. Right away, you want to browse for the finest deal. Still in markets wherever commercial space is close, you can not establish an informed conclusion till you recognize what your alternatives are. Plan upon visiting various possible sites and acquiring a great deal of time while you want to appraise the leasing landscape.
Value tractability. Contrary to residential leasing, ability to be flexible must be the basic condition for growing companies. Even though location will determine rental costs, a business upon the move can not afford to be secured into a long-term lease arrangement. Whenever the business actually sets forth, you might enclosed in a space that you've outgrown long since.
Talk terms. Commercial space landlords are want to talk terms with renters. As a matter of fact, a lot will purposely balloon rental quotes retail leasing lawyers to allow room for negotiation. Thus by a tenant's view, it is crucial to talk terms till you've made an agreement everybody could accept.
Check over References. Your landlord will inescapably check up on your references, merely you should check into your landlord's references also. A landlord who does not fulfill his duties could get an albatross close to your company's neck. Contact additional renters to assert your landlord's record in matching his obligations and satisfying his promises.
Confer with Your Attorney. Commercial leases are awkward legal documents holding piles of details and conditions. Unless you have a legal background, there's a beneficial risk you'll neglect something crucial, and so get your lawyer to go over the lease prior to you signing on the dotted line.
Commercial Leasing Don'ts
Over-lease. A lot of first-time renters have the error of leasing more space than they really need. For a general rule, most businesses just require approximately 200 square feet per employee. Depending upon the nature from your business, that amount might increase. However, in most events you're better off leasing less space for a shorter time period and holding the alternative of moving as your business maturates.
Be admonished. Landlords incline to consider first-time renters on a sure measure of skepticism, specially whenever this is the first time you've leased commercial space. Of their position, deserved diligence takes them to check references, call for credit reports, and ask about your business' financial condition. Simply do not allow the action get you depressed. Compliance on the process is an essential step towards determining the perfect new space for your company.
Disregard Lease Details. Since the continuance from your lease, your activities will limited to the circumstances of the rental. In your avidity to get in and hang a shingle, do not overlook the contingents from the lease. Whenever a condition dismissed your activities at whatever point in the time to come, talk about it with your landlord and remedy the lease to speculate your worries.