10 Questions to Ask Before Signing a Commercial Lease
Ready to sign a commercial real estate lease for an office building, retail space, or other business use? Take a few minutes first and read through this list. After the ink is dry on the lease, it's too late to make changes.
1. Have I read and understood the entire lease?
Yes, you do need to read it. I know, it's a very long (and face it, not very interesting) document, but you do need to know what it is in it.
Check the definitions; do they align with your understanding?
Check the key terms and definitions? Do they align with your understanding? If you don't understand ask for clarification. Look especially at terms like the right to cancel.
Many landlords will use a "standard" or "boilerplate" lease that has general terms for all leases. If you have negotiated something different, make sure it is included. Even more important, make sure that standard language and your special language don't contradict each other.
Do not assume they got it right. Make sure you check the start date, end date, rent, rent escalation and any other special terms you negotiated for. Also, be sure you know what you are obligated to do.
What is the landlord obligated to do? Can you terminate it? Make sure you know what you are getting into.
Just because they gave you a lease, does not mean your negotiation is over. Many of the terms in the lease are still negotiable. When you're reading it, make a list of all the provisions you don't like and send it to your landlord. You may be surprised by how much they are willing to change.
3. Do I have my business structure in place?
If you want to be protected by your corporate structure, make sure it's in place first. Be sure you have your filed Articles of Incorporation for a corporation or Articles of Organization (some states call these documents Certificates) for an LLC back from the Secretary of State before you sign.
In addition to having this structure in place, make sure you have documentation that this lease has been approved by your board of directors. You should have a corporate resolution to show that your board has considered this lease and approves it. If you don't have a board of directors, there should still be some documentation that this lease is approved.
For example, most leases use the term "CAM" which stands for "Common Area Maintenance". You should be allocated a percentage of the CAM you are responsible for based on the percentage of the building you are renting.
Be sure the percentage is based upon the size of the building and does not vary based on how much of the building is rented.
Th CAM section of a commercial lease is probably one of the most confusing sections of the lease and you will be surprised by how much you are paying for. Check to make sure you are not paying for things that relate to the landlord's marketing efforts or legal fees associated with negotiating other leases.
Other things you may want to strike are any administration fees of more than 3%, paying for benefits for the landlord's employees, build-out costs for other lease units. Read more about negotiating CAM terms.
5. Have I considered asking for a CAM Stop lease?
Most leases these days are "triple net" (meaning you pay rent, plus your proportionate share of CAM and property taxes for the property).
You can ask the landlord for a CAM Stop lease, meaning that you only pay for the increase in CAM fees and property taxes above your initial lease year (frequently called the "base year").
While the landlord may increase your base rental rate, it takes a lot of the "mystery fee" out of the rent. Alternatively, ask for a cap on the CAM so it cannot increase by more than a certain negotiated percent. Pay attention to how and when the CAM fees increase during the term of your lease?
6. What is my responsibility for capital expenditures?
"Capital Expenditures" when used in a commercial lease typically refer to major structural expenditures, i.e. roof, foundation, HVAC (heating, ventilation, air conditioning) and other major repairs and any replacements needed.
What is "standard" is different from town to town and property to property, but try to avoid signing any lease that shifts the burden of these repair or replacement costs to the tenant. If your landlord is requiring you pay for these costs, there are compromises.
For example, if the lease says you are responsible for HVAC repair and replacement, suggest to the landlord that he strike "replacement" and that your repair obligation is limited to a maintenance contract, maybe two times per year, and that you be responsible for all general repairs up to a certain annual maximum amount.
Check to see if the landlord has the right to terminate the lease in the event you ask for an assignment; that is, for someone else to take on the lease if you sell the business. For many businesses, your location is a big piece of its value. Some businesses try to assign a lease in order to get out of it, but a landlord will want to re-negotiate the terms with the assignee.
If the landlord has the right to terminate the lease once you ask for an assignment, that could kill your sale. Ask the landlord to remove this provision or allow it be modified so it does not apply in the event of a sale of your business. Understand that the landlord will still want the right to reject the assignment if the new tenant is not financially acceptable.
Similar to the assignment of a lease is the common practice of taking on a sublessee. As it sounds, a sublessee is another business that works in your lease space under your lease terms. You pay the lease and the other party pays you a portion of the cost. Many landlords don't allow a sublessee, but you may want to share costs with someone. If you think you might want to take on a sublessee, you'll need to negotiate with the landlord before you enter into the lease.
8. Does the lease have an arbitration clause?
Many contracts these days have an arbitration clause. These clauses state that both parties agree to settle any disputes with arbitration instead of litigation (going to court). Read the lease contract to see if the arbitration clause is mandatory. Make sure you have a right to participate in selecting the arbitrator and other decisions for arbitration.
If you can get away with signing a lease with no personal guaranty, you are extremely lucky. Most landlords these days will not sign unless you personally guaranty the lease. But guarantees are negotiable.
Consider providing a guaranty for only a portion of the lease term, say half. Or negotiate for a guaranty that lasts only 6 to 12 months after you terminate rather than the remainder of the lease term.
10. Am I being realistic?
If your lease constitutes 3 percent of a larger property, the landlord will be much more unlikely to negotiate with you than if your space is 25 percent or more. To truly understand what items are important to negotiate, consider hiring a lawyer to review the document and help you with the negotiations.
Your lease may seem incredibly one-sided and burdensome, but there are some very good reasons for many of those provisions and an attorney can help you decide when to cut and run and when the risk is worth it.
This discussion includes information from Susan Dawson, a partner at Waltz, Palmer, and Dawson LLC.
For More Information on Commercial Leases