Common Commercial Lease Mistakes and How to Avoid Them —
A common business need that every business owner should be prepared to deal with is finding the space for their business operations, be it a manufacturing facility or an office space. Whether it is the main office, a shop, or a manufacturing facility, renting real property can be an asset or a liability depending on how early the negotiations start and how well the final terms are written. Leasing the space out can also be tricky if you and your tenant are not on the same page from the start. Let us give you an overview of some of the common commercial lease mistakes that new and experienced business owners make, how you can avoid them, as well as some details that you should know about.
The Basics
The business of commercial leasing is a cutthroat world. As they say in real estate, everything is about the location. If you are selling a luxury brand, you definitely do not want to be caught up in the outskirts of town. If you are dealing with downtown clientele, you cannot afford to locate your office in the suburbs. If you are processing specialty food items, you would also want to locate your commercial kitchen in the most suitable location for the business. If you have a manufacturing facility, you would want for it to be easily accessible by your target customers. Keeping yourself and your business in the right location could be critical to your cashflow.
What is a commercial lease? Basically, a commercial lease is an agreement written up and signed by both parties, the lessor and the lessee. The lessor is the individual who owns the property or leases it out to others. You, as the business owner, is the lessee. If you get confused by the terms, think of it as the relationship between the landlord and the tenant.
A commercial lease is entirely different from a residential lease, both in the key legal terms, in the landlord’s rights and in the financial terms. When you enter into a commercial lease agreement, it is expected that you are knowledgeable about commercial real estate and prepared to negotiate in accordance with the then current local market conditions. Having rented an apartment as a tenant is not sufficient experience for negotiating a commercial lease. If you do not protect yourself properly when entering into a commercial lease, it could lead to legal, financial and tax problems down the road.
The Common Commercial Lease Mistakes to Avoid
There are a couple of things that you need to avoid in order to make sure that your commercial lease agreement will protect you.
Failure To Hire A Realtor, A Lawyer, Or A Professional
Hiring a realtor, a lawyer, or any professional with great experience in the law and commercial leasing is not an added cost but an added layer of protection. All of the terms that are included in a commercial lease are going to be easily handled by individuals who know the market and understand what is and is not negotiable in a lease. They can explain the terms to you and you can understand what is going on. The professionals can also help control your expectations of the lease agreement so you do not feel frustrated and overly focused on any of the terms that are cast in stone, for example, due to landlord’s financial obligations to the lender, and overlook the items that can and should be negotiated.
Remember that even if you have some knowledge already, having a professional look at what is being offered to you is still very important.
Failure To Understand Specific Lease Terms
Problems often arise when the understanding of one individual is different from the other on the same contract. Failure to understand the specific lease terms is a common problem that individuals face when it comes to their commercial lease. Here are some of the common lease terms to brush up on:
Your Contract Inclusions: your contract inclusions, what is provided in your contract, and the limits of the relationship are all neatly provided in the lease agreement. This would include the following:
- Property specifics like the type of property being rented, the address of the property being rented, and the size of the property.
- The term of the contract which includes the period for which the tenancy agreement is covered, and the renewal terms as well. This part should include the term of the tenancy and whether the tenancy is for a fixed term or renews periodically.
- There is also, in clear terms, the financial aspects of the lease agreement such as the amount of rent payable, when the first payment and subsequent payments are due, whether the first or last payment is prorated, and how often must the rent be paid.
- Business terms and conditions must also be specified such as the type of business that may be conducted on the premises. Some landlords are very specific here and so you should be too.
The Property Expenses: It is a common mistake of new commercial tenants that they fail to understand what their payments cover, how the expenses are divided against tenants, what happens in case there is a problem with the property and such other terms as may be necessary to make sure that the tenant and the landlord know their responsibilities during the time of the lease.
Escalation Clause: Another common mistake that individuals make is ignoring the escalation clause in the commercial lease. It is a common provision that, if misunderstood or not properly factored into the budget, may cause problems along the way. Escalation clause varies depending on many factors. It could come in the form of a 5 percent annual increase, a flat increase, or an increase based on consumer price index variations. It can come at every renewal of the lease agreement or annually, if the lease agreement is beyond one year. Whatever the terms of the escalation clause may be, it is important for a commercial tenant to understand what it means.
Insurance Provisions: If you are a tenant or a landlord, it is important to keep insurance terms clear and concise and understand what insurance you are committing to provide to avoid a default under the lease. Since both parties, the landlord and the tenant, are affected by a loss or a claim, they should both sit down and understand what the insurance policies cover and what they do not cover and which party will be obtaining insurance for each category of insurable risk.
Failure to Negotiate Ahead of Time: A commercial lease is different from a residential lease in that many commercial leases contemplate allowances for minor property modifications to accommodate the tenant. A buildout that follows may take from one to several months, depending on the scale of property improvements. While minor paint touch ups would be quick, moving office partitions, or installing a reception or a kitchen could take several months. The landlord knows that, and the closer the tenant is to their required start date, or upcoming lease renewal, the less generous the landlord is with allowances and less likely to negotiate other terms valuable to the tenant.
We are Here to Assist
Whether you are knowledgeable about the law and the commercial real estate market or are looking at the first commercial space to rent, you will benefit from professional guidance on common commercial lease mistakes. Our Firm is available to help you negotiate the best terms possible in the current market and make well informed decisions on your commercial lease agreements. Learn more about our services specific to real estate law and contact us.
