Reviewing a commercial lease can be a daunting task for anyone who has not done it before. From the numerous pages of dense text to the typical overuse of legalese, these documents tend to be some of the least user-friendly that I come across as a business attorney. Yet, reviewing them is something that most new business owners preparing to open their doors and existing business owners looking to expand into their first space have to do. Without proper review and consideration, a problem in a lease or with the landlord can sink a blossoming company.
Here are a few provisions (and the related “pitfalls”) to be on the lookout for as you go through the process of reviewing a commercial lease:
• Base Rent vs. Additional Rent/Operating Expenses/etc. This is one of most obvious items to be aware of, but it also one of the most commonly misunderstood. In addition to the obligation to pay the base monthly rent (which is often calculated with respect to the square footage of the leased space), many commercial leases allocate responsibility to the tenant to pay for utilities, insurance, property taxes, and maintenance/repairs. And for retail spaces and multiple tenant office buildings, tenants will likely have to pay a proportional amount of additional rent relative to the “common areas” that benefit the leased space. Thus, it would be a good idea to obtain a cost projection for all leased-related expenses and also request past utility bills and maintenance invoices attributable to the leased space, as the “bottom line” cost of leasing commercial space can be surprisingly high.
• Maintenance/Repair/Replacement Obligations. This item can be downright scary for tenants, especially when they sign a lease and then realize the full extent of their obligations. As I mentioned above, most commercial leases allocate at least a portion of the responsibility to the tenant to pay for maintenance and repairs. However, it is not uncommon for the tenant to be responsible for the full replacement value of HVAC, structural defects, and roofing in the event that issues arise during the lease term with that equipment. As a result, these provisions should be closely scrutinized, and it would be a good idea for a prospective tenant to obtain an inspection of the equipment and other items that benefit the leased space before entering into lease.
• Term and Assignment Provisions. These items may also appear obvious but often can be misleading when the effect of such provisions strongly benefits the landlord. Specifically, renewal options might be excluded from the lease agreement (even though the tenant assumes that they exist), or the ability to assign the lease in the event that the tenant wishes to sell its business may be prohibited (although even if a lease is silent on assignability, assignment may still be allowed – the issue then becomes whether the original tenant is ok with remaining on the hook for its obligations under the lease). Accordingly, a prospective tenant should be proactive to negotiate these provisions with any eye towards its exit plan and long-term goals.
• A Few More Miscellaneous Items. Other provisions I want to briefly mention include: (i) whether the landlord has a right to relocate the tenant (especially relevant if the leased space is in a multi-tenant retail location, like a shopping center); (ii) whether the landlord reserves the right to acquire a lien on the tenant’s personal property or trade fixtures used at the leased space; and (iii) whether both the landlord and the tenant have similar rights to terminate the lease (based on certain events, including at a minimum the other party’s breach of the lease). Overall, I point these out because they are just a few examples of provisions that are often heavily slanted toward the landlord’s benefit.
There are a myriad of other provisions that I could highlight as “buyer [tenant] beware”, but the items mentioned above represent some of the most common issues that I see in my own practice or hear about from other attorneys and business owners.
If you are new business owner looking into leasing space or an existing business owner preparing to expand into your first space, I recommend reviewing a proposed commercial lease with an experienced attorney because of the potential pitfalls referenced in this article (and the many others that I did not get to address). The money you spend now could be a fraction of what you might spend later as a result of issues arising from a commercial lease that does not protect your interests.
If you have further questions or I can be of assistance, please do not hesitate to contact me.
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PLEASE NOTE: This article and other content published by Alexandre M. Zucco, Esq. is solely intended to inform readers about general developments in the law. Accordingly, this article is not intended as legal advice on any matter. There are many factors that may affect your situation. You should not act or refrain from acting because of information found here without first seeking appropriate legal or other professional advice from someone who is familiar with your particular circumstances.