Understanding Your Commercial Lease Agreement

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Are you thinking about renting a space for your business?

Renting space is likely a business’ highest expense and a huge potential liability.  Although each commercial lease is different, they usually have similar terms that you should be aware of before signing.

In this article we outline many of the terms you should be aware before you sign your lease

Who is the tentant?

Make sure your company, not you, is identified as the tenant.  This helps to protect you from personal liability.  However, many landlords will require a personal guarantee anyway, especially for a new business.  This means that you may have no choice but to be personally responsible for any breach of the lease.

Are there fees in addition to the monthly rent?

Everyone looks to make sure the base monthly rent amount is correct, but leases almost always include “Additional Rent.”  Additional Rent means that you’ll also be responsible for other costs like HOA fees, real estate taxes, utilities, maintenance fees, garbage collection, etc.  These costs are not necessarily fixed and may change during the term of your lease. 

 

Do you have the option to stay beyond your lease term?

Sure, the term of your lease is important, but you also need to be aware of and negotiate for a renewal option.  You’re likely to spend a lot of money improving the premises.  You may even have to completely build out the premises to suit your needs.  Many leases are for a fixed term of 3-5 years.  If you don’t have an option to renew your lease for additional years, you may be forced to leave at the end of the term without being able to recoup your costs for all the improvements.  The more money you put in, the more time you want to be able to stay.

What does “as-is” mean?

Most commercial premises are offered in “as-is” condition by the landlord.  This usually means that not only are you accepting the premises in its current condition, but landlords also disclaim any representations regarding the suitability of the space for your intended use and whether your business is a permitted use under zoning and other ordinances.  So you could end up signing the lease and be bound for a number of years’ rent only to discover that the town won’t allow you to use the space for your type of business.  Or you could discover that the costs to get the premises code compliant are so high that you would not have signed the lease.  Ultimately, you are likely responsible for obtaining a certificate of occupancy and any other necessary permits from the town.

Together with the “as-is” condition is the fact that you will likely be responsible for making sure the property complies with the rigorous standards of the Americans with Disability Act if your premises is open to the public.

What do you have to repair and maintain?

A landlord’s repair obligations are often limited to structural issues, like the roof, plumbing, or foundation, or to the common areas of the property shared by a number of tenants.  You will most likely be responsible for all repairs to the interior of your premises.  You may also be responsible for maintaining, repairing, and/or replacing the HVAC system.

Depending on the location of your premises and whether there is more than one tenant at the property, you may also be responsible for maintaining the sidewalks and parking area, including plowing and salting.

You may also have to return the premises to the landlord in “white box” condition when you vacate.  This means that you may have to both pay to construct and demolish your interior improvements.

 

Who is responsible if your equipment or inventory are damaged?

Landlords are usually not liable to damage caused to your equipment or personal/business property, like inventory, within the premises.  The expectation is that you will have adequate insurance to cover those damages.

What insurance is required?

Many leases detail the tenant’s minimum insurance requirements.  But those are just minimums and may not cover certain liabilities that exist due to the specific nature of your business.  Going hand in hand with the two points above, you want to make sure that you have adequate insurance to cover all the systems and areas you are responsible for maintaining and repairing, as well as to cover your equipment, fixtures, inventory, and other property located at the premises.  For more information on specific types of insurance, here is a link to another blog post, Protecting Your Business With Insurance.

 

What is a force majeure clause?

Covid has focused a lot of attention on force majeure clauses, and they are almost always in commercial leases.  However, be careful in assuming it protects your business.  Most force majeure clauses in commercial leases gives the landlord an opportunity to delay or avoid performing its obligations completely as a result of certain unforeseen circumstances, like storms, wars, and pandemics.  However, most of the clauses also state that none of those unforeseen circumstances excuse the tenant’s timely payment of rent.  So just because an act of god occurs that may cause you to close or reduce your capacity, that usually will not allow you to delay payment of or reduce your rent.

Summary

As you can see a commercial lease can be somewhat complex. We always recommend that business owners work with an attorney to review the lease with you so that you have a clear understanding of your rights and what you’re responsible for. 

Disclaimer:

Information contained in this post is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the with Michael H. Ansell, Esq., or other competent legal counsel.

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Picture of Michael Ansell, Esq.

Michael Ansell, Esq.

Michael Ansell is the founder and managing member of NextGen Counsel LLC. Throughout his years in practice, Michael focused on a variety of areas that impact small businesses, including contracts, employment, commercial leasing, corporate governance, construction, and general litigation.

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