7 Things a Commercial Tenant Should Know Before Signing a Lease

1. Beware the Binding Nature of Your Lease

This should go without saying, and yet, far too many businesses learn this the hard way. Yes, a lease is a binding legal contract. No, a landlord is not likely to let you out of it just because your business is struggling. Let's say you sign a 5-year lease for $3,000 per month. You just signed a $180,000 contract. Every commercial tenant should go into a lease with the mindset that it will be bound to pay all or a substantial portion of the full contract price. (There are some exceptions; e.g., the landlord's duty to mitigate.)

2. The More Eyes the Better

The more people who read your lease before you sign it, the better. Please do not have the attitude, "well, if I don't sign this, then I won't get the space, and I really want the space, so I'll just sign it and hope nothing goes wrong." Ignorance is not bliss when it comes to leases. Have your real estate agent read it. If you have a business loan, have your lender read it. There may be provisions that affect the lender's ability to get repaid. Have an attorney read it. And of course, you need to read it and understand it. Do all this before you sign. And do not be afraid to negotiate provisions with which you are not comfortable.

3. If it is in the Lease, it Will be Used

Ignore statements from the landlord like: "We can address those things later, after you sign the lease"; "It's just boilerplate"; "That has never been an issue"; "All the other tenants agreed to it"; "Don't worry, we would never enforce that." Approach any lease with the mindset that if it is in the lease, it will be used, and it will be enforced. Likewise, if the landlord makes an oral promise that you want to be able to enforce, ensure it is memorialized in writing in the lease.

4. Beware CAM Charges

Typically, a commercial tenant will be responsible for at least some of the landlord's overhead. The landlord's overhead is often referred to as both operating expenses and CAM (Common Area Maintenance) expenses. Landlords want to pass as many of these as possible to the tenant. Some examples of these expenses include: new striping on the parking lot; landscaping; property taxes; insurance premiums; holiday decorations; etc.

Try to negotiate limits on these expenses. If the landlord knows the tenant is obligated to write a blank check to cover all overhead, it has no incentive to keep costs low. There are at least three types of limits you can negotiate.

First, you can negotiate a monetary cap. To know what a reasonable cap might be, ask to see the expenses allocated to the space for the previous year or two. Second, you can negotiate limits on the types of expenses for which the tenant will be responsible. For example, if your business has few customers who drive to your location and park, you can suggest that it would be unfair for you to have to pay to re-stripe the parking lot. And third, you can negotiate the frequency of certain services. For example, will the parking lot be re-striped every 3 years or every 5 years?

Always have a provision that excludes expenses resulting from the intentional or negligent acts of the landlord or another tenant. Always ensure the overhead is allocated fairly compared to the other space available to rent (not just the space that is rented). For example, if the property has a capacity for 10 office tenants but only 7 tenants are occupying, you should pay 1/10th of the expenses, not 1/7th. Always have a provision that gives you the right to inspect the landlord's expense accounting so that you can verify you are paying your fair share and nothing more.

5. Beware the Square Footage

The annual rent for a commercial space is generally determined by a price per square foot. Tenants usually take the landlord's word for how many square feet the tenant will be renting. But, what if the square footage is exaggerated by, for example, 300. Maybe there was a measurement error. Maybe the space was remodeled. Whatever the reason, at $10 per square foot, that is an additional $3,000 per year. Over a 5-year lease, that's an additional $15,000. You will want to consider verifying the square feet of the space you are considering.

Furthermore, you should know that the square footage you are renting may not be the square footage your business actually occupies. "Usable Square Feet" is the amount of space occupied. "Rentable Square Feet" is the Usable Square Feet plus a percentage of the total square feet of the common areas (e.g., hallways, stairwells, elevators, lobbies) allocated to each of the tenants. Many landlords calculate rent based on the Rentable Square Feet. This is considered standard. However, it is reasonable for landlords to charge a lower rental rate for the common areas than they do for the Usable Square Feet. When considering a space, ask the landlord how much of the square feet you are renting is usable and how much is related to the common areas. Ask what rates are used for each. This will help you understand if the landlord is being fair.

6. Beware the Use Clause and Exclusive Clause

A use clause tells the tenant the types of things for which it can (or can't) use the property. For example, a use clause may require a tenant to use the property only as a restaurant. Or, it may be more specific and require the tenant to use it only as a pizza restaurant. It can get even more specific and dictate menu items and times when the restaurant may be open. The goal for the tenant is to have the least restrictive, most broad use clause possible. If you want to start selling t-shirts with your restaurant logo, you should ensure the use clause is broad enough to allow you to make that decision without having to ask permission.

Use clauses can also protect the tenant. For example, if you are an accountant wanting to maintain a professional image, you probably do not want a tattoo parlor next door. You can ask the landlord to agree to lease other units only to certain types of businesses and/or not to others.

Exclusive clauses are often seen in shopping center leases. An exclusive clause allows a tenant, usually a larger tenant, to corner the market on a certain product or service. For example, a pizza restaurant won't want the landlord to lease to another pizza restaurant. If you are lucky enough to get an exclusive, you should include a provision that allows for a fixed amount of damages (liquidated damages) in the event the landlord violates your exclusive so that you do not have to prove how much money you lose to the competition.

7. Beware the As Is Clause

Commercial leases may contain a provision that says that the tenant agrees that it has had the opportunity to inspect the property, accepts the property as is, and accepts that the property is suitable for the tenant's business. These provisions are dangerous for tenants. What if you are a salon, and after signing the lease, you discover the electrical panel for the property won't house enough breakers for your needs? Or, what if the plumbing is in the wrong place? Tenants must take extra care to ensure the property is ready before signing the lease or that they will be able to make the needed improvements. Tenants should also ask for a provision wherein the landlord agrees that the property is fully compliant with all code requirements at the time the lease commences.

The attorneys at CT Law can help you review, edit, and negotiate a commercial lease you are considering to help you save money and better protect yourself in the long run.

This article provides general information only and is not intended to be legal advice. It is not intended to be exhaustive. Please contact a professional regarding your specific situation.