When your business decides to move to a new building, expand or even open a new location, you will need to sign a new lease. There are certain precautions that you need to take into consideration.
You already know that a commercial real estate lease is a serious commitment, and in most cases, it is also a long-term agreement. It is essential to do a deep dive into all of the contract details to avoid significant mistakes.
Though we aren’t legal professionals, we have over 30 years of experience negotiating in this space. The more you know, the better you can advocate for yourself and work towards a contract that fulfills your needs as well as your landlord’s, keeping in mind that your landlord’s interests are going to be different from yours – and while they are invested in your success, your best interests may not be their primary consideration.
What Exactly Are You Leasing?
When you’re looking at your lease, the very first thing you need to be aware of is exactly what your responsibilities are in the lease. There are many different ways that your landlord can draw up the lease. Early on in the lease, you will likely find a definition of “Premises.” This definition drives a lot of the responsibilities in the lease. Are you just leasing the internal building space? Or are you leasing the entire parcel on which your building is located?
If you don’t take a close look at these clauses upfront, you can wind up with unexpected costs down the line. Parking lot maintenance can include plowing, sealing, repainting lines, handling pothole repairs, and even insurance issues if someone gets injured. Costs like that add up quickly – you never want to be blindsided by them.
What are Your Responsibilities?
Once you know exactly what you’re leasing, you need to check your responsibilities for the space. Some leases will cover basic utility replacement costs if your HVAC system or the plumbing goes up. Others require the tenant to handle that themselves. There is no “right” way to do it; it all comes down to a business deal.
Leases are structured on a continuum. On one end, you have the gross lease – all of the responsibilities of repairs, maintenance, taxes, insurance, and so forth are the landlord’s – the tenant pays the rent, and that’s it. This is typical of older office leases. On the other end is the “absolute net” lease; the tenant is responsible for everything, the landlord collects the rent and puts it in the bank. This is more typical of leases for a free-standing building (think your typical McDonalds). The good news with the further you are on the continuum towards the “net” end, the lower your base rent will be. On the other hand, you are taking more risks.
One thing to note is that almost all items in a lease are negotiable. While a lease is a legal document, it is, first and foremost, a business deal record. You can always work with your commercial real estate agent to ask for large or small changes. Just make sure that you’re asking for something that can make sense for both parties. Negotiations always require a give and take.
You should also know that lawyers are there to protect you and your interests under the law. However, they most often are not experienced with actually administering commercial leases. As a note, many of these issues are business issues, not legal issues. It is your responsibility to work with your agent to review the lease carefully and note what you are and aren’t willing to do and what risks you are or aren’t ready to take.
What are the Listed Uses for the Space?
Next on the list are listed uses. When you are looking at a lease for a building or space, you likely already know that what you’re doing at present is allowed – but looking at the listed uses for the space is important anyway if you ever decide to expand your business or change your model.
There are three things to take into consideration with listed uses:
What you are permitted to do – you will generally find this in a “Use Clause.” Ensure that the use clause is sufficient, not only for what you want to do today but also for what you might want to do in three years.
What YOU are not permitted to do relates to exclusives that may have been granted to other tenants. One of the best examples of what You are not allowed to do is taking a look at a coffee shop in a complex. That coffee shop may include in its lease that nobody else in the complex can serve coffee or specialize in it. If the landlord agrees, that becomes an “exclusive” use. The established coffee shop is allowed to do it, but no one else can. Maybe YOU should ask for an exclusive – if you are a nail salon, do you want to compete with the beauty shop next door that might want to do nails as well?
What NO ONE is permitted to do — Landlords may also decide that there are certain things that they won’t allow at all on their property. Some may not allow vape shops or tattoo parlors because they don’t consider them family-friendly. Other times, the prohibited uses have more to do with laws and ordinances passed down from the town or state.
Keep an Eye Out for Part Two
A friend (Mark Nusinov, to give credit where credit is due) used to say, “Know your jewelry, or know your jeweler.” I think that is excellent advice for commercial real estate as well. If you don’t know it backward and forwards, get help from someone who does.
We’ll share three more things to look out for in my next post – keep an eye out! In the meantime, if you have any questions about leases or commercial real estate in general, contact Art Putzel at aputzel@troutdaniel.com or (443) 921-9326.
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