COMMERCIAL LEASING: WHAT YOU NEED TO KNOW BEFORE YOU SIGN
Commercial leasing is drastically different than residential leaseing and can confuse even the most advanced business person. As such, there are several things to keep in mind to make the process less challenging.
Letters of Intent
It is a good idea to draft a letter of intent with the landlord as soon as you choose your location and prior to signing a lease. This will allow you to layout the basic terms of the lease in a short document and to ensure that everyone is on the same page before the lease is drafted. A letter of intent will often save you time and money as a majority of issues can be determined and/or resolved immediately. Topics often covered in a letter of intent include: the amount of rent, the amount of the security deposit, date of occupancy and length of lease. Drafting Tip: The letter of intent should clearly state that it is non-binding and is only to be considered a letter of intent. Failure to do so could turn the letter from an expression of terms into a legal contract.
- Rent: Rent on a commercial building is very different than rent on a residential building. Commercial rent is often composed of several parts, each of which may have its own different method of calculation. In addition to what is known as the “base rent” which stays the same each month, there are often other fees, such as utilities, landscaping services, and property taxes, which are charged as additional rent. Many landlords will often pass along certain costs associated with operating the building, known as common area maintenance (or CAM) charges, to the tenants. The amount charged as additional rent is often assessed based on the square footage occupied. Sometimes the additional rent charged will be a flat fee and other times it will be determined based on a calculation of actual expenses compared to expected expenses and other times it is based only upon an increase in these costs over a prior year.
- Usage and other terms: It is important to make sure that your lease works for your business. Review the lease to make sure that the terms are acceptable, paying special attention to the amount of the security deposit, rules regarding subletting or assignment of the lease, the allowed hours of operation, vehicle and delivery access, security of the location and janitorial services. It is important to address these issues as soon as possible and ensure they are clearly stated so that there is no confusion.
- Build-outs/construction: If there is any construction to be done to the space, it is recommended that these items are done by the Landlord prior to occupancy. It is also recommended that a drawing of the proposed modifications be made by an architect and approved by all of the parties prior to the start of any work. Requiring the landlord to handle the construction may result in a higher monthly rent being charged but it is worth it as you will avoid a number of headaches. There are a number of issues involved when dealing with construction and if you are not familiar with the process, it is best to allow the landlord to bear any risk associated with the build-out.
- Insurance: Commercial leases often require the tenant to obtain certain insurance coverage or to indemnify the landlord against certain occurrences. It is important to talk to your insurance agent to make sure you are adequately protected and that the amounts request by the landlord are reasonable and acceptable.
- Personal Guarantee: Occasionally a landlord will request that a personal guarantee be provided to secure the lease. It is not recommended that you provide a personal guarantee unless you are willing to be held personally responsible for the payment of the rent and other required charges. Though in many circumstances providing a personal guarantee may be unavoidable.
Overall, it is important that you never sign a lease or enter into an agreement unless you clearly understand each and every aspect of the document. It is best to take your time and review all possible issues. If you feel overwhelmed or uncertain about any of the terms, it is best to consult an attorney to make sure you are adequately protected. Once you sign a lease you are bound by its terms.
Waltz, Palmer & Dawson, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Business Immigration, Litigation and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, Guardianship, Divorce and Family Law.
This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.