Hello and welcome to the first of (hopefully) a series of articles on the ins and outs of issues surrounding leasing commercial real estate. Having worked in this area as a real estate lawyer for more than 15 years, I’ve seen these matters from multiple sides, whether it be from the landlord, the tenant, the lender or the investor.
For my first blog entry – who doesn’t like lists? The following post focuses on some of the more misunderstood and looked-over provisions in a typical commercial lease. My goal is to help keep you abreast of what is going on in the law surrounding commercial leases.
Top 5 Commercial Lease Provisions For the Wary Tenant
1. What am I leasing?
Seems pretty basic right? The description in the lease of what and where you’re leasing has a direct impact on many other provisions of the lease. How is the square footage of the premises described? Rentable square feet vs. useable square feet (I’ll save that for another blog post topic)? Am I leasing in a building that’s under construction and if so do I have a right to re-measure the space? That’s just a start…
2. What’s my rent?
This is related to being able to verify the size of the space you’re leasing, and a tenant should be very clear on how your rent is structured. Is this a “triple-net” lease or a full service lease? Do I have to pay operating expenses and CAM? Do I have any protections in place to limit those costs that get passed through to me, such as exclusions and caps on increases?
3. How long’s my lease term?
The initial determination of this term of the lease should on its face be pretty easy, but consider if there will be a delay before you get possession of your space. When will the lease term actually commence – does it commence before I’m actually given possession (it may be)? Do I have the right terms in space to stay beyond the initial term of the lease (which time period is typically the same but often shorter than the initial term of the lease)? How’s my rent going to be determined in the future for those years?
4. Do I have an exit strategy?
When the lease is signed, both sides usually have the best of intentions and fully expect that the tenant will be in the space for the entirety of the term of the lease. However, we all know things change, but contrary to popular belief you most often cannot walk out of a commercial lease with your only loss being your security deposit (and your pride). Do you have the ability to get out of the lease with as little of pain as possible? There are options to put in place ahead of time that don’t involve you breaking the lease and risking getting sued.
5. Am I being asked to personally guaranty this lease?
So many commercial leases are with tenants that are a new small business that often have to have personal lease guaranties. Don’t be surprised if you’re asked by the landlord to put your personal assets at risk for your business’s obligations under the lease. These are unfortunately a cost of doing business, and even more reason to have a viable exit strategy as noted above.
An attorney with experience related to real estate contract writing and negotiation can help businesses of all sizes mitigate risks associated with signing a commercial lease. We’ll look more into each of these provisions in further detail in future blog posts. Stay tuned!