What you need to know about commercial leases

Nancy Watkins
Nancy Watkins

You’re ready to start or move your business, and your broker has found the right commercial location with rent you can afford. Now what?

Read the lease. I know, it’s long, boring and confusing. But you need to know what it says. Check the terms, start and end dates, rent amount and rent escalations. Did you negotiate any special terms? Are they in the lease? What are you obligated to do? Find out what you’re getting into. Sit down with your broker and go through the lease together.

Keep negotiating. Just because they gave you a lease doesn’t mean negotiations are over. As you read through the lease, make a list of the provisions you don’t like or understand and ask questions.

Get your business legal structure in place if this is a new business. If you want to be protected by that corporate shield, make sure it’s in place. Give yourself time to file anything required by the secretary of state. If this is an existing business, be prepared to show the landlord financials and perhaps a business plan.

Learn the terminology. Do you know what CAM expenses are? CAM stands for common area maintenance. If you’re signing a “triple net” lease, the three items you’ll be responsible for are property taxes, property insurance and CAM. You should be allocated a percentage of the expenses you’re responsible for based on the percentage of the building you occupy — your pro-rata share. These expenses are in addition to your rent. There are also “gross” leases, which mean the landlord is including these expenses in the rental rate. A “modified gross” lease includes these expenses, but the tenant pays for utilities in a separately metered space.

Consider asking for an expense stop lease. Most leases are “triple net.” But you can ask the landlord for this type of lease, meaning you pay for the increase in CAM, taxes and insurance above your initial lease year, frequently called the “base year.” While the landlord might increase your base rental rate, it takes a lot of the mystery out of the rent. Alternatively, ask for a cap on the CAM so it can’t increase by more than a negotiated proportion.

Read the CAM definition. This is probably one of the most confusing sections of the lease, and you might be surprised by how much you’re paying for. Check to make sure you’re not paying for things that relate to the landlord’s marketing efforts or legal fees associated with negotiating other leases. Also, watch for buildout costs for other lease units or benefits for the landlord’s employees. Ask about anything that concerns you.

Understand your responsibility for capital expenditures. When used in a commercial lease, capital expenditures typically refer to major structural expenses — the roof; foundation, heating, ventilation and air conditioning; and other major repairs and replacements. What’s considered “standard” differs from city to city and property to property. Typically, the burden of this type of expenditure should be on the landlord. But there are compromises. For example if the lease states you’re responsible for HVAC repair and replacement, suggest to the landlord you strike “replacement” and limit your repair obligation to a maintenance contract.

Is the lease assignable? Check to see if the landlord has the right to terminate the lease in the event you ask for an assignment. For many businesses, location constitutes a big piece of its value. If you accept an offer to buy your business, you would need to assign the lease to the new owner. If the landlord has the right to terminate the lease once you ask for an assignment, it could kill your sale. Ask the landlord to remove this provision or allow it to be modified so it doesn’t apply in the event of the sale of your business. Understand the landlord will still want the right to reject the assignment if the new tenant is not financially acceptable.

Plan to provide a guaranty. If you can get away with signing a lease with no guaranty, you’re extremely lucky. Most landlords won’t sign unless you personally guaranty the lease. But guarantees are negotiable. Consider providing a guaranty for only a portion of the lease term, say half. Or negotiate for a guaranty that lasts only six to 12 months after you terminate rather than the remainder of the lease term.

Be realistic. If your lease constitutes 3 percent of a larger property, the landlord will be less willing to negotiate than if your space occupies 25 percent or more. To truly understand what items are important to negotiate, consider hiring an attorney to review the document. Your lease might seem incredibly one sided and burdensome, but there are often some good reasons for many of those provisions.

Last, but not least, work with a professional commercial broker. By doing so, you’ll have someone who can help you through the entire process and ensure you have a mutually beneficial lease upon which you can count.