Signing a commercial lease agreement marks an exciting time in your business. You found a great location that you envision growing your business in. But before you sign the commercial lease agreement, take the time to review it, revise it and discuss it with your landlord. There are common traps in lease agreements that can create a huge headache for you in the future. Oftentimes, landlords or management companies use a template with generic boilerplate provisions that don’t address a lot of issues that might arise. This article goes over some important clauses you should make sure are in your commercial lease agreement before you commit.
The Basics – make sure at least these are in your commercial lease agreement:
- Base rent
- What base rent includes - electricity, trash, water, property tax, insurance, etc...
- Term or length of the lease
- What happens after the initial term ends (does it become month-to-month or do you have to move out?)
- Rent price changes after the end of your initial term.
- Proper description of the premises (don't forget the parking spaces!)
- The permitted use of the premises - work, hours allowed to work, or work/live allowed
- When rent is due
- Security deposit and/or personal guarantees required and conditions on how you get it back
- Exit clause - what are your right to terminate the contract and under what conditions.
The Details – be sure to address these provisions in your lease agreement:
- Improvements, alterations and repairs – who is responsible and who pays for what type of improvement and repair. There is a very high likelihood something will need to be fixed during your lease period. However, what types of repairs will cost you and which will cost the landlord? Some great examples that often come up are when the roof leaks due to a storm or when the A/C breaks. As for improvements and alterations, be sure to discuss this with your landlord. You will probably want to make some physical changes to the premises to fit the style of your business. However, you want a procedure of how to get approval for them and if they are considered an improvement, will the landlord help cover the costs? Have a fixtures clause that states that any fixture you add on the premise is still yours and you can take it when you leave unless otherwise negotiated.
- Maintenance and code compliance – Who will be in charge of maintaining the property and ensure that it follows all codes and laws? For instance, if the premise has landscaping, who will be in charge of continuing to maintain the look? If during an inspection, you find out you need to build or change parts of the premise, who will have to pay for it and make sure it passes the next inspection?
- Hours of operation – when are you allowed to be in the premises? Are you allowed there 24/7 and if so, are there HVAC (air-conditioning) restrictions?
- Right to sublease – do you have a right to sublease and under what conditions are you allowed to?
- Insurance – Are you required to carry insurance and what amount of coverage is required?
- Pet Clause – Many employees are starting to bring pets to work so it may be necessary to include a pet clause to either allow or disallow pets onto the premise.
- Landlord right of entry – When is the landlord allowed on the premise, how often, and what is considered enough warning for them to come onto the premise?
- Signage – what types of signs or window dressings are allowed on premise to promote your business to the public?
- Breach of contract – outline what the consequences are if you breach and what happens if the landlord breaches. If you go to arbitration or mediation or litigation, be sure to address which jurisdiction you fall under.
- Option to renew – do you have the right or priority to renew your lease after it ends?
Remember, this list is not exhaustive. Discuss with other business owners and with your landlord of other provisions to include. Your business is unique so it is difficult to cover all the possible scenarios in this article. I highly recommend you also consult with a real estate attorney to review your contract before you sign it.