Business Leases from the Tenant's Point of View

A business's lease is one of its most important contracts. But if I had a thousand dollars for every business client who did not carefully review its lease I could retire. Often businesses are intimidated by the landlord's massive, pre-printed form or "standard lease." They simply sign. They do not realize that changes to the landlord's proposed lease can, and should be, negotiated. It is especially important for your lease to provide a reasonable allocation of costs, liabilities and risks between tenant and landlord. The lease must also reflect the particular requirements of your business.

I have also seen fairly often that a landlord will propose a form of lease that does not fit the property or premises to be leased!

Here is a checklist for commercial or business tenant's to consider before signing a lease:

1. Parking. How many spaces are available? Can the number of spaces be reduced by the landlord without the tenant's consent? Are parking spaces reserved for your business or open to the customers of other businesses? Can the landlord unilaterally change the way your customers have access to the parking?

2. Signage. Are your signs allowed? What kind of signs are permitted on your business premises or in other places, such as at the street entrance? Who pays for maintaining the signage and what is a reasonable estimate of the maintenance cost?

3. Access to Your Premises. Can access to your business be disrupted or changed? Are there limitations on when you can have access, such as after hours?

4. Alterations. Will you need to make alterations to the space before you can open for business? If so, do you have to pay rent during this time? Will the landlord provide an allowance for some or all of the improvements you need to make?

5. The Lease Term Can you extend your lease? If so, on what terms?

6. Additions to Monthly Rent. "Triple Net" (or "NNN")expenses and common area maintenance (or "CAM")charges can add a lot to the the cost of a lease. While "Triple Net" does not have a universally accepted meaning, the charges comprised by this term are commonly real estate taxes and utilies, insurance premiums and maintenance costs. Often the definition of these items can be negotiated to reduce the tenant's expenses. CAM charges concern common areas that are shared by more than one tenant, such as lobbies, landscaping, sidewalks and parking areas. Often a lease form will include a charge for the landlord's overhead or a management fee. The lease should spell out the tenant's proportionate percentage share of CAM charges and exclude inappropriate charges.

7. What Other Ways does the Lease Affect Your Business? As your business develops, there are certain possible changes that the lease should address. These should be negotiated before you sign the lease, not later, because later on you may not have much leverage. For example, can you open another business nearby? Can you expand or relocate your space, and if so, on what terms? Can you restrict competing businesses from leasing space from the landlord in the same building or center? If you are less successful than you expect, or simply if your circumstances change, can you sublease some or all of your space or assign the lease to another party? Can you cancel your lease before the end of the term?

8. Insurance and Casualty. If your premises are damaged or destroyed by fire or other casualty, does the lease require the landlord to have insurance for repair and rebuilding? On what time schedule? Or would the lease require (or allow) you to rebuild? Having to close your business for an extended period while the landlord rebuilds (or decides whether to rebuild) could be ruinous.

9. Other Traps for the Unwary. Under many "standard leases" (a) you can lose your lease if the landlord's lender forecloses; (b) you cannot cancel the lease if the space is not available when the lease term begins; (c) you can be liable for hazardous waste contamination of the property that existed before you signed the lease;(d) you can be liable for repairing or upgrading your space to comply with applicable law, such as the Americans with Disabilities Act, even if the violations existed before you signed the lease; and (e) financing for your trade fixtures and equipment is prohibited.

THE BOTTOM LINE: From the tenant's perspective, its business lease is too important not to be reviewed and negotiated carefully. Almost certainly the time and cost to do so will be small compared to the potential cost of nasty surprises at a future time. As they say, an ounce of prevention is worth a pound of cure.

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