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10 Things to Check Before Signing a Commercial Lease

Author: Michael A. Faerber Date: 03/29/2013

Categories: Commercial Leasing, Corporate and Business Law

A commercial lease is one of the largest financial and legal commitments a business makes. So before signing a lease, you should ask your attorney to review it to understand what costs, responsibilities and liabilities the landlord is passing on to you as the tenant. You should also determine which, if any, terms you can revise to make them more reasonable. Here are 10 topics that deserve particular attention:

1. Relocation

Landlords may retain the right to relocate your business at its sole discretion, an action that can be very disruptive to your business. If possible, it is best to remove this section. Alternatively, you might request revisions that require the landlord to pay the costs for a new build-out and moving and/or limit the period or the number of times you can be moved.

2. Penalties for Defaults

Your landlord will want to ensure that your business properly follows the lease requirements. To incentivize you and to protect its interest, the landlord will include penalties for defaults. You should make certain the penalties are reasonable and that you will be given written notice from the landlord as well as a reasonable opportunity to cure the default before a penalty is applied.

3. Personal Guarantee(s)

Landlords will often require personal guarantees from the principal owners of a business, and possibly from the principal’s spouse. To avoid a personal guarantee, you might pay a larger deposit, which the landlord can use as additional security. If a personal guarantee cannot be avoided, then you should try to place limits on the amount of liability. Such limits may include having the guarantor only be liable for a certain amount at any given time, such as one year’s worth of rent, or it might provide for the guarantor’s liability to be reduced over time. In addition, it may be possible to arrange for the personal guarantee to expire before the end of the lease term if your business proves to be a good tenant.

4. Time Requirements

Leases contain numerous deadlines. In addition to payment of rent, they may cover when to submit space plans if new construction is to be done, when to provide the landlord with periodic financial information or updates to insurance requirements, and the time period during which you may exercise an option to extend the lease. Before signing, you should confirm that all deadlines are achievable. Throughout the lease term, you should use a calendar reminder system to keep careful track of date requirements.

5. Insurance

You should always provide the insurance section of the lease to your insurance agent. Ask the agent to confirm that you will be able to obtain the required coverage and that the requested insurance is commercially reasonable and necessary for your intended business. Your agent should also offer comments to the insurance language and provide you with premium quotes.

6. Landlord Liability

Landlords try to avoid liability for actions that result in damages to the tenant or the premises. Often, they seek to pass responsibility for such issues on to you as the tenant or to have your insurance cover any such damages. However, it is reasonable to request that the landlord be liable for damages as a result of negligent or willful actions of the landlord, its employees or agents.

7. Assignment/Sublet

The landlord will usually include language in the lease that restricts your right to assign the lease or sublet the premises. You should request that the landlord not unreasonably withhold, condition or delay any required consent.

8. Options

You may want to include certain options in the lease. These can include an option to extend the term of the lease beyond the initial term, or an option to rent additional space in the building if it is required as your business grows. If a landlord is willing, you may want to request more than one option term. If possible, the parties should agree to the economic terms of the options when the lease is signed to avoid disputes or misunderstandings at the time when the option is exercised. From your perspective, it is also desirable for any options to be assignable along with a permitted assignment of the lease.

9. Financial Statements

If the rent is based upon gross receipts of your business, as it sometimes is in retail leases, the landlord will require regular financial statements. When rent is not based upon gross receipts, you should either try to avoid this requirement or limit how often you are required to provide financial statements. You should also understand if you are required to provide audited financial statements. If possible, you should limit the audit requirement which can be very costly to your business.

10. Advertisements/Signage

Landlords like uniformity throughout a commercial building or shopping center. It is important for you to review and understand signage requirements and other limits that may prevent or restrict certain types of advertisements.

If you have any questions regarding the issues above or leases in general, please contact Michael Faerber at mfaerber@mcmillanmetro.com or by phone at (301) 251-1180.