What You Don’t Know Can Cost You Money in a Commercial Lease Agreement

30 Nov What You Don’t Know Can Cost You Money in a Commercial Lease Agreement

A commercial lease agreement is typically a very complicated agreement that you can be held to for many years. It is important to have a commercial lease reviewed by a lawyer who specializes in commercial transactions because it is a legal document that can last three to ten years, or even longer.

There are many clauses to consider that will have a significant impact on your rights and the value you earn out of the Lease.  Commercial Lease Agreements will have specific clauses that may outline important details like your right of first refusal, termination conditions, escalation clauses, improvements as well as practical things such as parking, building rules, etc. It is very important to understand these clauses and the impact that they may have on your business.

Take Steps To Protect Yourself On Moving Day

If the space you are leasing is being renovated or built new, be sure to include provisions in the commercial lease agreement for what will happen if the space is not ready by the move-in date. It’s important to spell out what adjustments will be made in the event you must wait. For example, you may be moved into another space, which would mean you would incur additional moving expenses.

You will also want to give yourself a few extra days buffer before and after your move-in date for the unexpected and to avoid costly downtime. Think ahead to how your business will handle disruptions.

Understand How Commercial Lease Payments are Calculated and Who Pays Property Taxes

There are different ways of calculating lease costs.  You may be familiar with typical residential leasing terms, but in a commercial lease, the terms are typically very different. You need to be aware of what’s included and what’s not to avoid paying for unexpected extra costs.

Leases are typically calculated per square foot, but will also likely include a proportionate share of common areas, like boiler rooms, janitorial closets, stairwells, lobbies, electrical vaults and the like.

Rental Costs are usually described in one of the following ways:

• “Gross” Rent – Includes taxes, insurance, and repairs and is a flat monthly fee
• “Net” Rent – Requires you to pay for some property taxes in addition to rent
• “Net Net” Rent – Includes base rent, some property taxes, and insurance
• “Triple Net” Rent – Includes base rent, some property taxes, insurance, and repairs/maintenance

In retail environments, it is also common practice to have a fixed rate + percentage of gross sales as the rental rate. Your lawyer can explain what the implications are for each type of pricing structure. Also, note that landlords expect negotiation. You should look at what competitive rates are to be prepared to negotiate for the best deal possible.

What is an Escalation Clause in a Commercial Lease Agreement?

Since commercial leasing is a long-term commitment, most landlords will want to protect themselves with an escalation clause. This mitigates the effect of rising costs, tax increases, increases in utilities, or building repairs. An escalation clause might include prorated increases in taxes, heat, and maintenance, or a rise in rent according to the consumer price index, or other statistical measures.

What If Your Business Changes Long-Term?

One of the biggest challenges in signing a commercial lease agreement is that the life of your lease can be so long, it can be difficult to predict how your business will change.  Over time, you may need to increase your space or might be in a position to buy your space should it become available for sale. Your lawyer can help you with right of first refusal options.

On the other hand, your business may require less space, or you may wish to leave the space early. It’s important to understand your termination conditions, as it may affect the decisions you make in your business.

If you wish to vacate the space, sometimes subletting is an option. With subletting, you lease your space out to a third party who meets the landlord’s requirements. You’ll need to make sure your lease agreement does not prohibit subletting.

The lease agreement may also have a provision that allows the Landlord to move your business within the larger commercial lease premises.  In a shopping mall or plaza, a landlord may have the right to move your business location within the mall should the landlord need the space presently occupied.  If your business requires a specific location within a mall or plaza, your lawyer will want to secure long-term rights to that exact space.

Improvements On A Leased Space

Often a leased space doesn’t come exactly how you wish it to be. Many landlords will adapt the space for your use, and the cost of this can be negotiated upfront. Decide what changes you want to make and discuss them upfront so there are no surprises. These adjustments could include partition walls, electrical or lighting changes, cabinetry, signage or parking.

Other Considerations For A Commercial Lease Agreement

The location, appearance, and functionality of your commercial space can affect your business’s success, so take the time to look at all the angles. Some final things to factor in:

Parking

Ask your landlord about parking for your employees and clients. Find out if the parking is shared if there are designated spaces. Also, be sure to ask where your customers will park. You’ll want to look at your future needs: will the parking accommodate future additions to your team or growing business?

Comfort

Ask about heating, cooling, and ventilation. Ensure that you will be able to control the temperature in your space. In addition, determine if your lease will include cleaning and security, garbage removal and landscaping.

Signage and Marketing

Look at the location of your business in relation to how your customers will access it. Can you increase your market by placing signage outside? What will be the costs and what are the limitations on lighting, electricity for the signage? You’ll also want to make sure you understand what the costs are for signage.

Proximity to Transit and Highway Access

Your customers and staff will be affected greatly by your access to transportation. Is the location easy to get to? Another thing you might not consider is traffic flow in and around peak periods such as the morning or afternoon commute.

A final thought. You’ll be spending a lot of time at your place of business, and so will your staff. Access to parks, restaurants and coffee shops and general personal safety all need to factor into your decision.

For these reasons and many more, we recommend that you engage with an experienced Commercial Lawyer who can assist with all these details and tailor your lease to best suit your specific needs.

For more information, visit these resources:

Stewart Esten Commerical Real Estate

Stewart Esten Business Leases