Often, one of the most important parts of starting a new business is securing a location. Many business owners are so overwhelmed and excited about their new endeavor that they simply find a place they like, and if it has reasonable rent, jump right in. And sure, they’ve heard the warnings of new business success rates, but that’s not going to stop them from moving forward.
As their lawyers, of course we want nothing more than for new business owners to succeed. And we certainly don’t want to slow their momentum while getting their businesses up and running. But we have also had clients come to us when they need to break a commercial lease, only to find that such action will result in significant, sometimes disastrous consequences.
But that can be avoided; or at the very least, mitigated. Like any other contract, a commercial lease is completely negotiable. This is because as much as you want to rent the premises, the landlord wants to fill their vacant space. To facilitate this, the landlord will often draft the lease and propose it to the tenant, making the agreement landlord-friendly. Here are the biggest things to watch out for:
It’s only fair that landlords have provisions to protect themselves to ensure rent is timely paid and that tenants are living up to their end of the deal. But that doesn’t mean that you have to offer up your first-born child in the event you can’t make your monthly rent payment. Make sure that you (or your lawyer) review all default provisions to ensure that before the landlord can seek any remedy, the default must be material, that you must receive adequate notice, and that it will not automatically cause the rent to accelerate through the remainder of the lease term.
Landlord’s Work and Tenant Allowance Provisions
Consider what improvements the landlord needs to make to the premises before turning over possession. After all, the less work the landlord does, the more you’ll have to do. As an alternative, landlords will sometimes pay tenant allowances to help tenants finance some capital expenditures and get the premises ready to operate. However, this is not free money. The allowance is prorated through the duration of the lease, and often, if the lease is broken, the tenant is responsible for repaying the unamortized amount to landlord. This could be sizable, so make sure these provisions are fair and reasonable.
Personal Guaranty Provisions
Often if a Landlord is paying a significant allowance, or if they are taking a risk with your business, they will request that you sign a personal guaranty (Read more on this in The Dangers of Signing a Personal Guarantee for Start-up Businesses). Make sure that if you sign a personal guaranty that you do not include your spouse, that you cap the time period you are liable for (especially if there is a rent acceleration provision in the lease), and do not allow the guaranty to automatically renew in the event you extend your lease term. After all, if you were a responsible, successful tenant through the duration of your initial lease term, they are lucky to have you.
Sure, this one goes without saying. But make sure that you understand how your percentage rent is calculated (if you have it), and make sure the permissible increase is capped each year. This is definitely one area of the lease that is heavily negotiated- so why pay more than you have to?
Option and Relocation Provisions
Make sure that you have an option to stay in the space at the end of your initial lease term and push for a right of first refusal. Also, if the landlord insists on having a relocation clause, ensure that you specify the minimum size, possible locations, and ensure that they will pay all costs associated with the move (not just the buildout- you will incur moving costs as well).
In sum, entering into a commercial lease can be extremely exciting, but it also comes with great risk. The above provisions are certainly important to look out for, but so are many others. It is therefore absolutely worth having your lawyer review the terms of your commercial lease before signing to ensure that you not only get the best deal possible, but also get the most protection.
Gertsburg Licata is a full-service, strategic growth advisory firm focusing on business transactions and litigation, M&A and executive talent solutions for start-up and middle-market enterprises. It is also the home of CoverMySix®, a unique, anti-litigation audit developed specifically for growing and middle-market companies.
This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney licensed to practice in your jurisdiction. If you have specific questions about your matter, please contact an attorney licensed to practice in your jurisdiction.