Office Space: What to Know Before Signing on the Dotted Line

Posted on July 30, 2018 in Business Transactions

Naomi’s t-shirt business, Chic Couture, has blossomed, and her inventory has outgrown all possible nooks and crannies in her studio apartment. Ned writes website copy for corporate clients, and, with gym socks all over the floor, there’s no way he want to meet with them in his studio apartment. Noreen wants to start a dance studio, and because of zoning laws (not to mention physical space), she’d never even dream of holding classes in her studio apartment.

For all of these reasons, all of these business owners have a need for office space outside of their homes. And signing a commercial lease can be a nerve-wracking proposition, as a lease is often your the largest single monthly expense that a business needs to pay each month. And don’t get me started about the possible personal financial risks.

So before exposing your company (and possibly yourself) to a parade of horribles, ask yourself the following questions:

  1. What kind of space do I really need? Ned needs space for the sake of appearances. As a result, he might not even need an office to occupy full-time, but more of a conference room or temporary office space. There are business centers (also called “executive suites,” or “virtual offices”) cropping up all over the country that can provide that kind of service. For a small monthly fee (far less than renting raw space and renovating it yourself with amenities), you can have a receptionist to answer (and forward) your calls, plus access to meeting rooms on an as-needed basis.
  2. How long do I need it for? It’s tempting to take a longer-term lease in order to lock in lower rate increases. But if the economic climate changes and your business slows down, you could be stuck with a large monthly expense that’s difficult to get out of. Noreen was optimistic about her chances for success, but recognized that her company didn’t yet have a financial track record. And, as a newlywed, saw that she wanted to have children at some point within the 10-year lease term that her landlord was proposing. Not knowing where her financial fortunes – or personal priorities — might lie, she opted for a space with a shorter term.
  3. Is the landlord requiring a personal guaranty? Landlords often ask for a personal guaranty from a business owner . . . and may refuse to rent the space without one. When you sign a personal guaranty, it means that you, personally, will make good on the lease payments, even if the company can’t. This is a huge risk for small business owners like Naomi, where the company provides her sole source of income: if the business cannot make enough money to meet its expenses, it is unlikely that Naomi herself will be able to make the payments in its place. As a result, the only escape may be to file for personal bankruptcy protection.
  4. How much is the rent . . . really? You may have budgeted for the basic rent, only to find yourself subject to a host of additional charges . . . which the landlord calls “additional rent” and treats the payment of which as seriously as the basic rent itself. Items usually lumped in as Additional rent can include real estate taxes and charges for water (hot or otherwise), sewer, gas, steam, electricity, light, heat, power, and services supplied to your leased space . . . and a proportion of maintenance costs for common areas. Make sure you read the lease carefully to see if it covers these kinds of charges (for places like business centers, though, they tend not to arise) and, if so, get estimates on how much they can run. That’s your real monthly rent payment.
  5. What else am I responsible for? Especially when leasing storefront property, as Noreen wants to do with her dance studio, maintenance and repairs can add significantly to your monthly nut. Office leases can require that the tenant who occupies the street level must remove snow and ice, other obstructions or debris, and clean dirt (even graffiti!) in front of or on the premises. If you don’t do so, the landlord may, and will bill you. You may also be responsible for maintaining sprinkler systems, repairing air-conditioning and heating units, handling repairs (that do not affect the structure of the building), and removing garbage from the premises. These also need to be factored into your costs.

Negotiating the terms of a lease involves more than just knowing what space you want and how much the rent will cost your business. There are a number of hidden costs and factors that can escalate the rent over and above what you originally budgeted to pay each month. If the landlord presents you with a “take it or leave it” proposition, be sure you can financially absorb the risks that lurk within the lease. If not, you may be better served by avoiding those Lucifers altogether and looking for other space.

Leases are a particular kind of contract. So always be sure to have the lease reviewed by a lawyer, even if it’s a short one that you think you can handle. As with other contracts, a lawyer can spot what’s missing that could come back to haunt you. Unlike the old adage, what you don’t know could hurt you if you don’t know the questions to ask.

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