Leasing commercial space for your business is quite possibly just as important as day to day operations. When looking for a place to operate your business, there is much more to consider than the monthly rent. Just because a monthly lease payment is affordable, does not, in and of itself, mean that it is the right deal for your particular business.
If you have ever entered into any kind of legal contract, you know that they can be very lengthy and full of legalese. The reason being is that the landlord’s Attorney is making sure that all bases are covered. If you are not savvy to the meaning of all of this legal jargon, you may find yourself battling with “lease remorse,” after it is too late.
There are many considerations that should be carefully weighed, before putting your John Hancock on the dotted line. Below, I will discuss 5 items that require careful deliberation before signing a commercial lease.
1. Before looking at commercial space, do your homework. Check out the neighborhood to determine if it is a good fit for the product or service you are offering. For example, you probably don’t want to open a sub shop in a location where there will be sub shops on either side, just because the rent is cheap. You know what they say in the real estate industry, “Location, Location, Location!” You want to get the biggest bang for your hard-earned buck and you don’t want to throw your money away.
2. Speaking of money, have a well thought out budget. Know what you can afford and don’t look at places that are out of your price range. Anything over and above what you can afford to spend will cut into your profit margin. Inquire up front how much the rent is and when it is payable. Does the landlord require monthly or quarterly payments? What is the term of the lease? What happens if you have a change of circumstances before the term of the lease expires? Ask about a “break clause.”
3. Rent is most likely going to be one of your highest overhead costs. Be sure you understand what if any other additional fees are required, over and above the actual rent. Unexpected fees can wreak havoc on your bottom line. CAM (Common Area Maintenance) charges are very commonly passed on to tenants in some commercial leasing contracts. VAT (Value Added Tax) rates can also add an extra percentage to lease payments on commercial properties including offices, hotels, retail stores etc. Mixed use properties also have the potential for these fees.
4. By signing a commercial lease that provides for the landlord to have the ability to enter a Confession of Judgement against you, you run the risk of being compromised legally. A confession of judgement is a term that allows the landlord to enter a judgment against you, in a conflict situation, without you having your day in Court. Many states prohibit these types of clauses and/or language; however, the Commonwealth of Pennsylvania does permit this scenario so be on the lookout.
A typical confession of judgement (also called a cognovit note) looks something like this:
“The undersigned irrevocably authorizes any attorney to appear in any Court of competent jurisdiction and confess a judgement without process in favor of the creditor for such amount as may then appear unpaid hereon, and to consent to immediate execution upon such judgement.”
5. Know the difference between a net lease and a gross lease. The terms of a net lease require the tenant to be responsible for regular operating costs. Operating costs can include things like property taxes, property insurance, utilities, trash collection, maintenance and repairs, etc. Often landlords will pass a portion of these expenses on to the tenant. With a gross lease, the landlord assumes responsibility for these expenses.
Make sure you have read and understand the entirety of the lease. If you are not confident in your ability to do so, have an attorney review it for you. Once you have signed the lease, you are legally bound to the terms and conditions.
Ask yourself, all things carefully considered, if you are being realistic and if you have made the best possible deal that suits every aspect of your business. If not, revisit the terms. Contracts are always open to negotiation prior to signing. Just because you are handed a “standard” lease, don’t feel pressured to sign it. Above all, don’t be afraid to walk away if you have any unresolved reservations.
If you need help with a commercial lease, set up a time to talk to someone on our team here.
One area where many small business owners skimp on legal advice is with their commercial lease. If you're not careful and do not have a lawyer review your lease, you could be in for years of problems.
Most commercial leases are for a long term, typically three, five, ten years or more. One area to keep an eye on in your lease is the amount of rent. Sounds easy, right? You find a nice space that advertises itself for $1,000 per month. You get excited, run your numbers and decide your business can afford to pay $1,000 a month in rent. Not so fast. Look closely at the area that discusses the rent charges. Typically a lease will specify the amount of base rent to be paid and then there will be additional paragraphs that address additional rent. What is included in additional rent? A large number of things, depending on your landlord. Use and occupancy tax could be added, utilities, past due charges, many items might be specified, make sure you understand how much will really be added to the lease each month. If you aren't comfortable with the arrangement, negotiate!
Another area to closely watch is for any rent escalation clauses. As I pointed out above, a commercial lease is usually for a long period of time, several years or more. Do you think your landlord is okay with you paying the same amount of rent for five years or more? Think again. There is likely a rent escalation clause in the lease specifies what the base rent will be in years two, three, four and five. Make sure the exact amount is noted, along with the exact dates of when the new base rent rate applies.
I am an attorney that reviews commercial leases for a very reasonable rate. It's money well spent to make sure you are not placed in a bad position today or several years down the line when you are locked into an unfavorable lease. Drop me a line today about reviewing your commercial lease.
Sarah E. Holmes is a Philadelphia business attorney and strategist that helps start ups and established businesses looking to expand, protect their assets and increase their profits in an approachable, down-to-earth way. When you're looking for a business lawyer in Philadelphia, the Main Line or New Jersey, we can help.