A lease is an essential step for any business owner. You will need to secure a space for your business, whether you are opening a shop, renting office space, or moving into an office. It can take several years to find the right space in commercial real estate.
Signing the contract after you have found the space could seem like an inconvenient final step before your business can move in. A business lease, like all legal agreements, is important and requires careful research.
Walter Gumersell, partner at Rivkin Radler, said that it is important to plan when moving from one area to the next. Confirm the terms of your lease. Include clauses regarding rent, security deposit, term of lease, and use of space. He said, “You want it to be as wide as possible.”
It shouldn’t surprise that commercial leases have a lot of fine print. Before signing a lease, there are two steps you should take: Research extensively and become familiar with the typical statutes in business leases.
You should research the area by researching the zoning laws, getting to know the neighborhood, and vetting the landlord. You should know the details of your lease including the payment structure, personal risk exposure, transfer structure, landlord’s preferred holdover rate, and any nuisance clauses. These are important points to keep in mind, however, remember that commercial lease practices can vary from one state to the next.
Residential lease vs. Commercial Lease
If a business leases commercial property to conduct business, a commercial lease is required. Nishank Khanna is Clarify Capital’s chief marketing officer. A commercial lease agreement is legally binding between a landlord, and a tenant.
Khanna explained to Business News Daily that the landlord will rent out the business property (which is usually an office space) in return for money. “Commercial leases are typically for three to five year, which creates a long-term relationship between lessee and lessor. “
This may seem very similar to a residential leasing agreement, but there are important differences between a residential and business lease. A residential lease is not for business purposes.
Khanna stated that commercial leases are also less regulated and provide less protection than residential leases. They are generally longer-lasting and allow for greater flexibility in terms of negotiating conditions than residential lease agreements. “
A second difference is that residential renters are not usually responsible for property taxes. However, with commercial lease agreements it’s quite common for the tenant or landlord to be responsible at least some of the property taxes.
Elements for a Commercial Lease Agreement
A commercial lease agreement must contain certain elements and key information to be valid and enforceable. Khanna says that the lease should contain information about the rent, security deposit and lease duration, as well as any additional costs to which the tenant might be subject.
Khanna stated that the ‘other cost’ category was a very important one and should be thoroughly reviewed before signing the contract. “Building insurance and property taxes fall under the ‘other cost’ umbrella. Maintenance costs, as well as maintenance costs, are all included. These extra expenses can quickly add up to high overhead costs. “
Khanna noted that small-business owners need to be aware of the differences between permitted and exclusive use. An exclusive-use agreement can be particularly beneficial for small businesses in competitive industries.
Khanna stated that an emerging brewery would request permission to rent space in a community market to reduce the chance of competing sales. Without exclusive permission, another brewery could rent space in the market to try and win business from the same customers as the first brewery, reducing its profit substantially. “
Finding the right landlord, and a lease agreement
Do your research before you sign a commercial leasing agreement. Ensure you follow these steps when researching.
- Learn about the area.
If you are selling a product/service to the public while looking for a property to buy, take the time to look around and determine who your target clientele is. A small business’s location is crucial for its success. Make sure you take your time when looking for properties. Gumersell stated that this process can take up to two years, or longer. If your lease is ending soon, plan accordingly.
- Learn more about the landlord or building owner.
Gumersell stated that it is important to learn more about the landlord or building owner. Sometimes your landlord might not be the real building owner. Find out as much information as you can about your landlord and the building owner. If you’re going to be entering into a partnership, make sure that you know who the landlord and building owner are. Also, learn about their financial situation. Make sure they pay their bills on time.
For example, in some states, a landlord who fails to pay his or her mortgage payments to a bank or makes payments to the building owner can cause the tenant or business to be evicted. This is even though the tenant has always paid on time. This is just one example of the problems that can arise between a landlord and tenant. Gumersell stated that businesses can request information about landlords from the public records. To learn more about the landlord’s limited liability business or business entity, you can request documents.
- Research zoning laws.
The zoning laws are another aspect to be aware of. Your landlord might designate your space to run a restaurant. However, it is important that your goals are in line with your local laws. Sometimes a landlord or building owner might think that they can rent their space to a specific type of business but the area’s zoning laws don’t allow for it. These details can be aligned to ensure your business is able to operate in a city or town without major legal problems.
- Find out about nuisance laws and the environment.
Signing a lease is a way to ensure that your business can operate to its full potential once you have opened your doors. Many leases include extensive restrictions on noise, smells, and equipment. Ann Brookes is a tax lawyer who stated that she had to agree to an “offensive smells” clause when she signed a lease for a restaurant. Ann Brookes, a tax attorney, said that when she signed a lease for a restaurant, she had to negotiate an “offensive odors stipulation.”
She stated that the building regulations prohibited offensive odors. “Whether a smell is offensive or not is subjective. I therefore made sure that there was an exception for ordinary smells in a restaurant. “
Gumersell stated that it is important to study the basic environmental laws of the property before signing anything. These laws are often overlooked by landlords, which could lead to your business being sued.