A couple of months ago, we covered some lease issues that we’ve seen in our 30+ years of business here at TD&A. This week, we’re releasing part two and covering three more major things that you need to look out for when signing any lease for a new business space.
If you haven’t read part one yet, you can find it here.
Typically, when it comes to operating costs, such as maintenance, taxes, and insurance, you’re going to be paying your pro-rata share. In an office building, it might be a share of the increase; in a shopping center, it might be a share of every dollar. It’s always advisable to take a close look at this in your lease, though, to figure out exactly what costs you’re responsible for. These costs can add significantly to your cost of doing business; in one shopping center we manage, the rents are in the high teens per square foot, but operating costs and taxes add another $5.00 per square foot.
You’ll want to know what you’re paying vs what the landlord is paying. Make sure that you aren’t being gouged when you review your lease. You don’t want an unpleasant surprise when you get a big bill at the end of the year.
Who is Signing the Lease?
When it comes to decisions on whose name goes on the lease, you really need to consider your risk tolerance.
Putting the lease under your business results in less risk than doing so personally. If something were to happen to your business and it folded or suddenly lost a significant amount of money and you had signed the lease under your name, the landlord can come after you personally.
On the other hand, unless your business has significant assets and history, the landlord will likely seek personal guarantees. Like most other things in a commercial lease, who is ‘on the hook’ is a matter of negotiation. Signing the lease in the business name helps to mitigate your personal risk in case something goes wrong.
What Happens if Things Go Wrong?
This is always something to consider. Many people tend to look at leasing a new space through rose-colored glasses, with hopes for what the space will ultimately look like and how it can help them expand their business.
It’s important to remember that things can change quickly. One of the best examples of this is COVID-19. Businesses across the world had to pivot to remote work and online sales models. This means that many suddenly had office spaces that they weren’t using. Or, your business could skyrocket, and you need to relocate to bigger space much sooner than you thought!
In the case that you’re hoping to terminate your lease early, have an unresolvable issue with the landlord, or your business goes under, you need to know what your options are. Are you able to sublet the space? Do you have to pay a penalty for terminating the lease early? Does the landlord expect you to pay for the cost to find a new tenant?
Whatever the case may be, ensure that you negotiate this in the lease before signing. You are entering into a ‘marriage’ with the landlord for five, ten, maybe even twenty years. It will pay you to do some thinking up front as to what may happen, both good and bad. Think of it like insurance — by the time most people read and understand their insurance policies, it is too late to change the coverage that drove them to read it in the first place. The lease is similar; you need to read it, understand it and negotiate it before the events happen.
If you have questions about lease negotiations or commercial real estate, we are available to help! Art Putzel has over 30 years of experience working with businesses, landlords, and lawyers to come to an agreement that works for all parties. You can reach Art at (443) 921-9326.