If you own or manage a business that wants to rent space, do you know what to look for, and what to look out for, when negotiating and signing a lease with a landlord? Here are some tips.
First, remember that whatever the signed lease says, that’s the rule that will apply to your case. Unlike residential leases where a statute can trump a lease (and can sometimes protect the tenant more than the lease), courts usually enforce commercial leases exactly as written. That makes it important to pay attention to the terms of the lease before signing it.
Some commercial landlords propose a lease that is one-sided in their favor. How much can you negotiate with a landlord? It depends on the rental market. If the supply of rental space is tight, the landlord may figure that if you don’t accept those terms, the next person probably will. When the rental occupancy rate is low, though, you have a good chance of negotiating some changes. In any event, it never hurts to ask.
Clients often ask whether they should or must sign a personal guarantee of their corporation’s or LLC’s lease. It’s always best to have only your company or LLC liable for business obligations (like a lease) and not sign a personal guarantee. However, many commercial landlords will not lease to a small business without a personal guarantee (much like a bank won’t loan a small business money without a personal guarantee). You may not be able to avoid it, in which case, be aware what you are signing. If you are personally liable for a lease, it may make you more cautious about how long the lease goes, how open ended common area management (CAM) fees are, etc.
Commercial leases commonly shift all or most maintenance and repairs to the tenant. Try to negotiate the landlord being responsible for maintenance and repairs that are permanent or long-term in nature, like roof repairs, painting, etc. Since tenants are commonly asked to be responsible for heating and air conditioning repairs, try to negotiate a dollar limit per year, since replacing a compressor would be expensive and would benefit the landlord long after your lease term has probably ended.
It is easier for a landlord to evict a commercial tenant who fails to pay rent than it is to evict a residential tenant who is in default. You may know that residential landlords have to go to small claims court to get an eviction order, but that is not so with commercial leases. It is legal for a commercial lease to allow a landlord to change the locks to evict a tenant who is in default for a period of time set by the lease. If a tenant leaves property in the space and doesn’t pay rent, a commercial lease can allow the landlord to deem the contents abandoned. The landlord can move it out and sell it, give it away, or throw it away, if the lease allows this.
I represent both landlords and tenants in commercial leases (just not in the same transaction or in any other situation that would pose a conflict of interest, of course). I find commercial tenants who see me for problems with their landlord or with their lease often didn’t read the lease carefully before they signed it, and didn’t try to negotiate better terms. There are some other technical legal issues that are important, but are beyond the scope of this article, like indemnification and duty to mitigate damages; a legal review can address and explain these issues. An ounce of prevention can be worth a pound of cure when it comes to signing a better lease, or at least signing your lease with your eyes open as to what the rules are.
Kim K. Steffan is an attorney with Steffan & Associates, P.C. in Hillsborough, NC. She can be reached at 919-732-7300 or email@example.com.
This article was last updated in January 2020.