As your business grows, you may start investigating moving your business from your home to a commercial space and with that comes the commercial lease. For many people this is a new experience and it differs significantly from renting a residential space, as a result, many first time commercial renters sign bad leases. In an effort to clear up the confusion, this article should help you make the right decisions. As always, please consult with a lawyer and/or your Realtor before signing any leases.
It’s crucial to understand, practically and legally speaking, commercial leases and residential leases are quite different. Here are the main differences between them:
Before you sign a lease agreement, you should carefully investigate its terms to make sure the lease meets your business’s needs.
First, consider the amount of rent — make sure you can afford it — and the length of the lease. You probably don’t want to tie yourself to a five- or ten-year lease if you can help it; your business may grow faster than you expect or the location might not work out for you. A short-term lease with renewal options is usually safer. Many short term leases 12-24 months, usually have higher lease rates.
Also think about the physical space. If your business requires modifications to the existing space — for example, adding cubicles, raising a loading dock, or rewiring for better communications — make sure that you (or the landlord) will be able to make the necessary changes.
Other, less conspicuous items spelled out in the lease may be just as crucial to your business’s success. For instance, if you expect your camera repair business to depend largely on walk-in customers, be sure that your lease gives you the right to put up a sign that’s visible from the street. Or, if you are counting on being the only sandwich shop inside a new commercial complex, make sure your lease prevents the landlord from leasing space to a competitor.
The following list includes many items that are often addressed in commercial leases. Pay attention to terms regarding:
The lessor is the person who is granting the lease and who has the legal obligations related to the lease contract; the landlord. Sometimes this is an owner, but it may also be a property management company or commercial leasing company.
The lessee is the person leasing the space; the tenant. Although you may need to personally guarantee a lease, your business entity should be the official lessee on all documents relating to the lease.
This term describes costs for areas in a building which are not directly leased but which are a common responsibility, such as hallways, restrooms, stairways, and walkways. Most lessors add CAM costs to square footage costs to calculate lease payments.
A lease in which the rental payment includes other services, such as utilities, maintenance, and lawn/snow removal services. The landlord pays these fees and passes them on to the tenants in the lease. This can be a benefit to tenants as it saves from having to pay these additional fees, but the landlord may be charging more than actually is being paid for these services.
A lease which that states the landlord agrees to pay for all common expenses, including utilities, repairs, insurance and (occasionally) property taxes. The cost of a gross lease is higher than for other types of leases because all of these items are included in the amount of the lease.
A lease which includes the square footage costs, CAM costs, and all other ownership expenses, including utilities, repairs, insurance, and property taxes.
A lease in which taxes and insurance expenses are included in the lease payment. The lessor pays maintenance costs.
A lease which includes all taxes, insurance, and maintenance costs in the monthly payment.
The total square footage of the building or office being leased. This figure usually includes common space.
An abbreviation for ‘heating, ventilating, and air conditioning.’ It’s often pronounced as “H-VAC.” This is the costliest mistakes many commercial tenants ignore. If the HVAC unit for the building needs to be repaired and replaced, make sure you know who is responsible the the cost of the repairs. Many lease hold the tenant responsible for repairs.
Just because you are leasing a space, does not guarantee that you have 24/7 access to your new office or warehouse. Make sure that your contract meets your requirements.
An office or building that is ready to occupy. In most cases, this is a commitment by the landlord to bear the cost of any build-out.
The Americans with Disabilities Act. The Americans with Disabilities Act (ADA) requires all businesses that are open to the public or that employ more than 15 people to have premises that are accessible to disabled people. Make sure that you and your landlord are in agreement about who will pay for any needed modifications, such as adding a ramp or widening doorways to accommodate wheelchairs.
I hope this blog helps you make the right choices when leasing your commercial space.