If you’re a new business owner, you may not realize that a commercial lease is entirely different beast than its more familiar residential counterpart. This is because state governments have a vested interest in making sure that private citizens aren’t swindled by unscrupulous landlords, but they generally assume that business owners are equally as sophisticated and able to negotiate favorable lease terms as are commercial property owners.
As a general rule, leases for retail stores and manufacturing facilities tend to be much more complex than those covering simple office space, but regardless of what type of space you need to lease, you should take a few steps to protect yourself:
Realize That Most States Don’t Regulate Commercial Leases
Residential rental agreements are regulated by each state’s Landlord Tenant Act, and therefore, tend to be highly standardized. Commercial leases, however, are largely unregulated, and therefore terms and provisions may vary greatly from one contract to the next. You’ll need to read your lease agreement carefully, as what appears to be standardized “boilerplate” text may actually contain terms that substantially impact the scope of your rights and responsibilities as a tenant.
Engage a Tenant Broker & a Lawyer
New commercial tenants may not realize that they can engage their own broker, whose fees will be paid by the landlord if a rental agreement is successfully reached. The landlord’s broker naturally has the landlord’s best interests at heart, whereas engaging your own broker can help ensure that you see all potential properties on the market that might meet your needs. You broker can also put his or her knowledge of general market conditions to use in helping you negotiate concessions and rates.
Engaging a lawyer will help ensure you don’t get caught by any “gotchas” in the fine print. Lawyers can also help verify that your business activities comply with local zoning regulations before you sign on the dotted line.
Detail Property Alterations
Unless the property in question is a small office space, commercial landlords generally expect that tenants will need to make modifications to a given property to suit their exact needs. You’ll want to precisely list out all changes that will be made—including any signage you want to add, who will be in charge of design, and who is responsible for paying for any improvements, in an “Improvements and Alterations” clause.
You’ll also want to specify which equipment, furniture, and signage you plan to take with you when you leave. These are known as “trade fixtures,” and you may be required to return the property to its original condition if you remove anything substantial.
Finally, depending on what type of business you run and the space you’re looking at, you may need to make sure that you’ll be able to run high-speed internet cable through common areas into your establishment.
Understand What Your Total Costs Will Be
Are you signing a “gross” lease, or a “net” lease? The former means your rent payment covers all costs associated with the property, including property taxes, insurance, and maintenance for the space and for any common areas. “Net” leases, on the other hand, leave some or all of these costs to the tenant.
Another thing to understand is how much your monthly payment will go up, at what intervals, during the course of the lease. Your lease should include a schedule for any “rent escalations” that will occur.
You’ll also want to be clear on what your security deposit covers and how to get it back.
Leave Yourself an Out
If your business is relatively new, you’ll likely want to avoid signing a lease with a term of five years or more. Instead, see if you can negotiate a short-term lease with renewal options. While you may get fewer concessions from the landlord, paying more up front will likely be preferable to being on the hook for a hefty rent payment for several years to come. If you do end up signing a multi-year lease, see if you can include a clause that allows you to sublease the space if you find a tenant that meets the landlord’s criteria.
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