When you are moving your business into a new space whether an office, industrial or retail location, there are a number of decisions and protections you’ll want to consider before signing a lease agreement with a landlord. The lease agreement comes in many forms and every situation is unique, which is why it’s important for you as the tenant to review the document with a qualified business or real estate attorney.

Keep in mind that lease terms are always negotiable. You can assume that the document presented to you by the landlord favors the landlord and of course in many cases, has been prepared by the landlord’s attorney to be as favorable to the landlord as possible. It’s almost anticipated that you will push back on some of the items included in the lease that’s presented to you. 

When signing a lease, you’ll want to think about how the lease benefits your business now and in the future. As a lease is a multi-year commitment, it’s a worthwhile investment to pay for the time of an attorney to review the lease for you, to negotiate whatever is possible and when certain terms may not be negotiable, for you to be able to make a business decision as to whether or not this particular location and landlord are going to be in the best interest for you and your business long term. The following are the top five things to look for in your lease agreement.

1 – Timelines – You’ll want to look at the lease commencement date, when the rent is due and termination dates. Consider if there’s a period of time where you’re doing improvements to the property and whether you can negotiate deferring any rent payments during that period. Take note of the expiration date of the lease, renewal options, and any notices you may need to give the landlord toward the end of the lease. In some cases, you will need to let the landlord know within 60 or 90 days in advance of the expiration of the lease as to whether or not you’re going to renew, so you’ll want to put those timelines on the calendar and allow yourself enough time to conduct an evaluation of whether or not the space still suits your business needs to meet that notice period. Today, many businesses are finding that their real estate needs are either greater or lesser than before the pandemic so allow yourself the opportunity to determine whether some of the options you negotiated initially are still relevant or if circumstances have changed and are not as important to you now for your business.

2 – Parties to the Lease – Your lease is a particularly important document to sign in the name of your business entity from the start. The purpose of having a business entity such as a corporation or a limited liability company (LLC) is to provide the benefits of incorporation for tax purposes and liability protection. Even if you started your business as a sole proprietor and then later decided that you wanted to incorporate your business, you can still approach the landlord to put the business entity’s name in the lease. Here’s why this is important. The purpose is not to escape liability from the landlord but to create a clean corporate structure for liability protection from third parties. This will protect the business as a tenant and the landlord in a situation where any obligation for the business to pay a large judgement or settlement to a third party could impact the ability to pay rent. It’s also critical that all payments you make under the lease are made from your business entity to your landlord. If you were to pay your landlord from a personal account, then you’re at risk of jeopardizing the liability protection that the entity provides by commingling personal and business accounts. While this can be done in certain circumstances, it must be adequately documented to show that you’re respecting the separate legal existence of that business entity for you to still be afforded the entity’s limited liability protection. Landlords will still typically ask for a personal guarantee to hold you personally obligated for the lease but landlords can simply add the business entity to the lease agreement as a co-tenant. This ensures all of the property parties to the contract are identified. 

3 – Type of Lease – There are many types of leases with different names such as a gross lease, a triple net lease, a modified gross lease, double net, etc. What’s important are not the titles, but ultimately reviewing the language to know who is going to pay for what. When looking at the expenses paid by you as the tenant, this typically refers to things like maintenance, insurance, and real estate taxes. In a full-gross lease, the tenant pays the rent and the landlord pays for most everything else. A triple net lease is the opposite, where the tenant bears most if not all of the expenses related to the space. A modified gross lease is a negotiated deal where you pay the rent as a tenant and you negotiate what other expenses you would have to pay. 

It’s also important to know upfront which parties are responsible for paying property taxes. If your landlord is an individual who owns the lease and they pass away and the property is transferred to an heir, will paying any increases in that property tax get passed on to you as the tenant? If you take over a lease from another party or business that you purchase, are you now responsible to pay the property taxes and maintenance expenses for the property? These scenarios come up often which is why it’s always in your best interest to have your business or real estate attorney review the lease agreement and avoid costly surprises.

4 – Description of Premises – Premises will also define what you’re responsible for as the tenant such as maintenance expenses, who pays if something breaks or if major repairs or damage to the property need to be handled. Be aware of what is defined as the premises that you are benefiting from and what you are responsible for. As you’re taking a look at the space, consider whether you’re part of a large commercial office complex, a stand-alone building or how many other tenants are there. Are you utilizing the entire building’s premises? Are other tenants using the building? What are defined as common areas and are you responsible for paying for landscaping, trash or utilities? 

5 – Exit Strategy – We advise that business owners keep their exit strategy in mind whether planned or not when looking at what happens at the end of the lease. The economy and circumstances change over time, so if you choose to later sell your business, you may want to have a means to include the lease in the sale of your business which could make your business more enticing to a buyer. You may also wish to have a first right to purchase the building if the landlord wants to sell the property before it goes out to the market. If you need to close your business for any reason, you’ll want to know who’s responsible for that lease. In a lot of circumstances, when you shut down your business, you still may be personally responsible for paying the lease. So you do need to think about some of the unforeseen circumstances while reviewing your lease on the front end. You may also need to get out of the space and want to find a replacement tenant or may need to share the space with someone. Subletting or assigning the lease to that tenant will also need to be negotiated and will often include language that allows for approval of the landlord. In some cases, if you’re able to sublet the space to a tenant at current market rates and it’s higher than your rate, you can negotiate whether you can pocket or share some of that profit with the landlord. Usually, most lease agreements do not allow for subletting or assignment but as stated before, you can negotiate this on the front end.

Conclusion

You should look closely at all of the key provisions and the legalese in your lease agreement since you can assume that it is written to protect the landlord, so you as the tenant need to be very savvy about what is in this document in order to protect your long-term business strategy. Contact the Chase Law Group Team for a review of your commercial lease agreements to help you meet your business goals.