Look Before You Lease

Posted on August 12, 2019 in Business Transactions

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The hidden costs of a commercial lease might be more than you can afford to pay.

Like renting an apartment, an office lease gives your company the comfort of a place it can call home. But home can turn into a white elephant pretty quickly when business takes a turn–for better or worse. It’s harder to get out of a commercial lease than a residential lease if you find you no longer need as much space or, more happily, if you’ve outgrown it. So how can you make sure–especially in this economy–that you lease the space that fits your business?

Here are the top issues to consider before leasing:

  1. What am I getting and what can I do with it? Think about your short- and long-term goals. How much space do you really need? Do you truly need your own floor in the building? (If you’re in retail, the answer is probably yes.) What length of lease do you need? Long-term (10-year) leases can be comforting until you can’t afford the payments. You may be better off taking a shorter lease (e.g., two to five years) with regular renewal terms. Ask the landlord whether you can assign or sublet the space. At least if the space is occupied, it’s more likely you’ll be able to afford the rent.
  2. How much is the rent . . . really? Don’t look just at the advertised monthly rent. You may have to pay extra charges called “additional rent.” And the landlord will treat these just as seriously as the basic rent. Additional rent can include real estate taxes, hot water charges, sewer, gas, steam, electricity, heat and services supplied to your leased space. It can also include a proportion of maintenance costs for common areas. Read the lease carefully to see whether it includes these kinds of charges . If so, get estimates on how much they run. That’s your real monthly rent.
  3. What’s the cost of improvement? The price of the space makes you cheer, but the condition makes you cry. Is it a disaster area? Are you adding modifications to the space (called “build-outs” when new space is finished to your specifications)? If so, this could mean months of delay before you open your doors and make that first sale. If the clock is ticking–that is, if your landlord won’t agree to a rent abatement (a period of time to occupy the space rent-free) while you get the place into shape–you’re shelling out precious dollars without gaining income. Make sure you budget carefully for those construction costs.Negotiating tip: See whether the landlord will pay for renovations, or at least for tidying up the space so it’s usable. You only want to start paying rent once you can move into the space.
  4. What’s the cost of upkeep? Especially with storefront property, maintenance and repairs can add significantly to your monthly costs. Street-level tenants can be required to remove snow and ice, debris, and other obstructions. If at street level, you can be required to clean off dirt (even graffiti) in front of or on the premises. You may also be responsible for maintaining sprinkler systems, repairing air-conditioning and heating units, handling repairs that don’t affect the structure of the building and paying for garbage removal. These expenses need to be factored into your costs.
  5. Can I break the lease? You can break any lease–as long as you’re willing to pay the penalties. And commercial leases are full of them. If you’re late with the rent, default notices tack on interest and attorneys’ fees (yes, just for sending the notice). That’s true even if the situation was not your fault, such as a check lost in the mail. Should you fail to correct the problem by the deadline in the notice (usually two weeks or less), that alone can be grounds for eviction. Don’t expect too much sympathy from the courts, either; they are not prone to excusing the defaults of commercial tenants. And woe to the entrepreneur who provides a personal guaranty, which is common for landlords to demand from a new business. This means that even if your company fails, the landlord can still go after your personal income for the rent.

Leases are a particular kind of contract, so always protect yourself and your business by having a lawyer review the lease, even if it’s a short one you think you can handle. What you don’t know could hurt you if you don’t know what questions to ask. A lawyer can spot what’s missing that could come back to haunt you.

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