This week in the Freedom Friday blog and email newsletter, we're continuing the series 10 Steps to Take Your Small Business to the Next Level in 2023, and today we're discussing the eighth step to take your small business to the next level, which is commercial leasing. A major challenge that growing small businesses face is lease agreements. Whether it's negotiating a commercial lease agreement for office space or the small business is in the business of leasing residential and/or commercial properties, dealing with a lease is a key issue that many small businesses face on a regular basis. If you don't understand a lease agreement as a small business owner, then it's always a good idea to consult with an attorney who can interpret the lease agreement for you and explain to you the various provisions. Here are seven (7) key provisions to look for in any standard commercial lease agreement:
The first provision to look for in a commercial lease is the space. The space is the “what” that's being leased in the rental agreement. If your small business wants to lease office space, some commercial leases include provisions for common areas, e.g., hallways, restrooms, entrances, and elevators. If you look at the lease, does it quote a rental fee based on rental square footage, or usable square feet? Rental square footage usually includes common areas, while usable square footage will not.
The second provision to look for in a commercial lease is the term, which is the length of the lease. Every lease agreement should have a start date, an end date, and possibly options to renew. Some leases also provide an option for the tenant to buy the property from the owner.
Rent and Costs
The third provision to look for in a commercial lease is the rent and costs. Obviously, the lease will provide a dollar amount for the tenant to pay the landlord each month. However, some leases give the opportunity to the landlord to increase the rent during the term of the lease. For example, there are three-year leases where each year the landlord increases the rent each year by 2%. Another way in which an increase can occur is based on the Consumer Price Index (CPI). The lease might also provide for additional costs like maintenance fees, insurance, property tax, etc.
Improvements, Modifications & Fixtures
The fourth provision to look for in a commercial lease is any provision regarding improvements, modifications, and fixtures. The lease agreement should provide whether the landlord must agree to any improvements to the space, e.g. new carpets, more seating, cabinets, etc. Likewise, the lease should make clear who owns those modifications at the end of the lease term. If you outgrow the space or need to move, can you take the cabinets with you? Usually not because the landlord will own any improvements made to the space, but the tenant may have the right to remove any fixtures, which are items that become part of the property, but can be easily removed and with little effect on the building.
The fifth provision to look for in a commercial lease is a provision regarding repairs. The lease agreement should provide whether the landlord or tenant is responsible for specific repairs. For instance, some lease agreements provide that the landlord is responsible for certain types of repairs, but the tenant is responsible for other types of repairs. You need to know who has the responsibility to fix the plumbing, heat, and air conditioning. Also, most leases require the tenant to return the premises in their original condition to the landlord, with no exception for normal wear and tear, or any damage caused beyond the control of the tenant. These issues should be properly negotiated with the landlord when negotiating the lease agreement.
The sixth provision to look for in a commercial lease is the termination provision. Perhaps this is one of the most important parts of a commercial lease agreement, as there are two issues here. One issue is whether there are any requirements to terminate the lease before an automatic renewal. The other issue is early termination. Look carefully to see if the lease provides for early termination, and under what circumstances. If there is no clause in the lease for early termination, you need to negotiate one with the landlord, even if a penalty will apply.
Dispute Resolution and Attorney Fees
The seventh provision to look for in a commercial lease is the dispute resolution clause, along with the attorney fees clause, which is usually related. Many commercial leases require either mediation or arbitration as a means of avoiding the courts. In addition, most commercial leases will provide for an award of attorney fees to the prevailing party in any arbitration or litigation regarding the lease, including litigation for unpaid rent, etc.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at [email protected] to schedule a FREE strategy session.
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