Navigating the waters with a commercial lease can be moderately difficult. It’s a lengthy document, and there’s a lot of fine print, which can be easy to miss. It doesn’t matter whether you’re renewing an office space you’ve had for quite some time or you’re negotiating your first startup, reading the document carefully before you sign it can save you costly mistakes later on.
Common pitfalls can catch anyone off-guard when it comes to commercial leasing. Making an informed decision driven by data instead of instinct will serve you well as you negotiate your commercial lease.
Like many other legalities, negotiating or renewing a lease is a process. A letter of intent (LOI) is a document that’s involved when you first do business with someone, so this will be commonplace before you sign your first lease with a landlord. An LOI generally states that if a deal (in this case, Lease Signage) is to be executed, then certain terms are to be met. If these terms are not met, then no deal can be made. Terms that are contained in an LOI may include:
Quite often, there may be slight changes to LOI that can be easily missed by the tenant, so it’s important to match the lease itself and the LOI side by side to make sure everything is agreed upon. You may notice that the landlord has added a clause where they can raise the rent yearly, which is not in your LOI terms and something you’re not agreeable to. If you’re renewing a lease, 4SITE by CORT can use data to help you decide if the terms of the lease fit your needs and how to proceed.
Always look very carefully at the terms of use. While you may think that a lease’s terms of use should be straightforward in theory, sometimes terms can be very restrictive. For example, if you owned a coffee shop, and your primary function was to sell coffee, your lease may expressly prohibit you from selling coffee mugs or other merchandise with your brand name on the items because that is considered retail and is in another category. If you do so, you could be breaking the terms of use clause in the lease. This is why it’s imperative to look over these terms carefully. Also, depending on the nature of your business and the business space, you may want to add an “Exclusive Use” clause to the terms of use. This prevents another coffee shop from renting space within the same center. Similarly, for professional businesses, an exclusive use clause is something to consider as well.
There are many hands involved in the drafting, execution and signing of a commercial lease. Because of this, it can be quite muddy on when the actual rent is due each month. Here are some dates involved with your commercial lease:
It’s likely you’ll be working with a property management company, and the staff may be entirely different than the one who drafted the lease itself. Be very clear at signing when the rent is due, and have that written into the lease.
It’s commonplace for tenants to be responsible for the common area maintenance (CAMs) charges for the space that they rent (otherwise known as the operating costs). However, since you don’t own the property, generally, the utility bills won’t be in your name, so you’ll have to trust your landlord when it comes to paying the operating costs. Very often, he or she may show you the bills, but not always. For this reason, you want to ask for a record of the CAMs from the past several years. This ensures that you are paying a fair price for the CAMs while you are in the building. 4SITE can also help you manage your space and ensure you’re optimizing it correctly, which ultimately saves on energy bills and operating costs.
The guaranty is the binding part of the lease, and this is the section where you are named as the guarantor. All sections of your commercial lease matter, but read the fine print of this section with very keen eyes. If you are a small business owner or LLC, this section can be particularly damaging if you foreclose, because you will have lost any liability protection as the guarantor. As guarantor, you are responsible for the lease, and landlords are allowed by law to pursue your finances and your assets should problems occur.
One of the most common pitfalls when it comes to commercial leasing involves an error in math. Lease terms are most commonly for five years, but simple clerical errors often have tenants in their lease space for six years instead of five. The best thing to do is have a lease term and escalation calculator handy to ensure that the lease term is for exactly five years, unless you and the landlord have agreed on a longer-term lease. Do remember that4SITE by CORT can help if you’re on the fence when it comes to the decision to renew your lease.
References:
1. https://bongiovilaw.com/2017/12/common-tenant-pitfalls-commercial-lease/
2. https://stratafolio.com/5-common-commercial-real-estate-lease-mistakes-to-avoid/
3. https://www.reoptimizer.com/real-estate-optimization-blog/commercial-leasing-mistakes-to-avoid
4. https://www.dhbusinessledger.com/business/20190417/top-ten-mistakes-in-commercial-leases