You’ve just found a space you’d like to rent for your new or expanding business. The landlord or their agent has just handed you a lease they’d like you to sign. What are some common issues to watch for?
1. Usually, you can negotiate. Unless the market is so hot that it’s hard to find the type of space you need, you can probably negotiate some of the terms. You may have received the landlord’s “wish list” lease because some tenants actually sign it without reading it (let alone negotiating it).
2. Repairs (especially HVAC). Commercial leases commonly shift much or all maintenance and repair costs to the tenant. The hot button issue is usually repairs to the heating and air conditioning system. It is expensive to pay for replacing a compressor, for example, and the landlord will probably benefit from it long after your lease has ended. Consider negotiating an annual cap on tenant expenditures for HVAC repairs, so that the landlord has to help pay for major repairs. Some landlords require tenants to pay for an HVAC maintenance contract with a particular vendor, but this is usually a modest expense. Before accepting provisions making you responsible for all repairs, also learn the age and condition of electrical and plumbing systems. These details could affect your view of what is fair.
3. Length of your lease. Many factors affect how long a lease is best for you. If you are new in business, you may prefer a shorter lease term and a renewal option. Remember that if you go out of business, the landlord can usually still enforce collecting rent from you through the rest of the term; you reduce risk with a shorter term. If you are comfortable that your business will be around, if the current market has attractive lease rates, or if this particular location is important to you, you may prefer to lock in a longer term lease. A renewal option is always good if you can arrange it easily.
4. Personal guarantees. Some landlords require all owners of a small business tenant to personally guarantee the performance of the lease. The owners are then personally liable for what the tenant promises to pay in the lease. If a landlord requires a personal guarantee, they are unlikely to negotiate that away, but you can ask.
5. Duty to mitigate damages. Most leases have a long, legalistic section about tenant default and the landlord’s remedies. If you close down, the issue is whether the landlord is obligated to take steps to re-lease the space to offset what the lease requires you to pay until the term ends, or whether the landlord can sit back, not try to find another tenant, and look to you for the monthly rent for the entire rest of the term. You reduce your risk if the lease requires the landlord to take reasonable steps to find another tenant. If a landlord thinks they won’t be able to collect from you anyway, they may try to find another tenant in their own best interest, but you’d rather that be required and not discretionary.
Reading the draft lease, thinking about your business needs, and getting help with legalese will allow you to make more informed decisions and manage your risk.
Kim K. Steffan is an attorney with Steffan & Associates, P.C. in Hillsborough, NC. She can be reached at (919) 732-7300 or firstname.lastname@example.org.