6 QUESTIONS TO ASK BEFORE YOU SIGN A COMMERCIAL LEASE
Commercial leases are complex and can be intimidating to tenants who may have less power in negotiations. Even worse, the effects of a bad lease can last for years. If you must move or if your business fails, you may still be on the hook for payments. That’s why it’s crucial that you fully understand the terms of the lease. Below are some of the most common questions you should ask. However, you should also consult an experienced real estate attorney to help you negotiate where possible and protect your best interests.
- What costs do I pay? Depending on the type of lease, you may be paying all or part of the taxes, insurance, and maintenance associated with the use of the property, in addition to monthly rent. You could also be paying a monthly percentage on your sales or other administrative expenses. It’s important to understand exactly what you are paying and how much the landlord can increase the amount each year. Be prepared to negotiate.
2. How are costs calculated? Typically, there are formulas associated with fees in the contract. One of the most confusing provisions involves common area maintenance (CAM) charges. These include taxes, insurance and expenses associated with operating and maintaining the entire property. You would typically be allocated a percentage of the CAM fees based on the percentage of the building you’re renting. However, the calculations can be very complicated, and often include charges that shouldn’t be paid by the tenants. An experienced attorney will understand the formula and terminology being used and identify the inappropriate charges and have them eliminated.
3. How much insurance will I need? Insurance can add significant costs to running a business. The lease may require certain insurance coverage such as a minimum amount of Commercial General Liability (CGL) insurance to protect the landlord. However, you may need to get additional insurance for the landlord for other risks as well as to protect yourself.
4. Can I sublet or assign the lease? Tenants may want to sell or move their business and don’t want to be penalized for breaking the lease. However, landlords often don’t allow tenants to assign the lease or sublet it to another tenant, or they charge additional fees for it. An experienced attorney is best able to negotiate appropriate and customary language which will give the tenant the most flexibility under different business, financial and economic scenarios.
5. What are the renewal terms? Issues like the length of the lease, how many renewal terms are available, rent increases, concessions and other matters can have a lasting effect on your business. If you think you are likely to renew, consider these provisions carefully so you get the best terms.
6. Can I modify or improve the space? Do you need additional wiring for electrical, computer and phone networks, Wi-Fi, etc.? Is major construction needed? You must understand the types of improvements that can be made, your tenant improvement allowance, and fees the landlord charges to supervise and inspect the work. Again, these can be negotiated.
In addition to these questions, make sure you investigate the history of the landlord and the property so you understand what you may be getting into by entering into the lease. For example, who is the landlord and how long have they owned the property? Are there plans to sell the property? When was the last time the building was renovated? Who is the property manager and what is their track record? If there are other tenants in the building, how long have they leased their space and what is their experience with the landlord? You need to do your own due diligence on these questions.
This is just a sampling of issues to consider. An experienced attorney can help you avoid potential problems and negotiate beneficial terms. If you are considering leasing commercial space, contact us for a consultation.
Read our related post – Five Reasons You Need An Attorney To Review And Negotiate Your Commercial Lease.