A large percentage of business entrepreneurs rent their business premises rather than purchasing them. Negotiating good lease terms is critical to your company's ultimate chances of success. If your lease expenses are too large a percentage of your overall overhead, no matter how well you do with the rest of your business operations, your business may be in trouble from the start.
Don't go into commercial lease negotiations unprepared or for that matter without an experienced attorney, particularly if you are a first-time business owner. A commercial landlord's first interest is to make a profit for him or herself and the success of your business is secondary. If you default on your payments, the landlord can always find someone else to plug in as the replacement tenant. Or, if the landlord can't find someone to step into the lease, your liability for damages may continue to increase as long as you are in default.
A slow economy makes things even worse because a commercial landlord would rather take a gamble on you by putting you in a high expense lease, even if you can't make the payments over the long haul, than let the property sit vacant.
How to properly protect yourself: get informed legal advice from an experienced commercial lease attorney
First, have the right professional support and do your homework. Discuss your goals with an experienced business attorney skilled in the negotiation of commercial leases. Your lawyer will be able to help you from the beginning so you are not trying to undo something that is already signed. He or she will have special knowledge to use in reviewing and negotiating important lease terms. Your legal counsel can lead the negotiation and consult with you as things progress.
If you choose to attempt to negotiate yourself, be sure never to agree to any terms or sign a lease without your attorney's final review and approval. Any acceptance of terms you might tentatively agree to should always be "subject to your attorney's final review and approval."
Do your homework
In addition to getting legal counsel, do not hesitate to take the time during lease negotiation to consult with other professionals who may be able to provide important information you should have before making any final decisions. Such professionals might include tax accountants, real estate brokers, architects and space planners. If part of the lease agreement will include any redesign or upgrading of the space at your expense, be sure you have gathered any necessary estimates, bids or assessments early on.
Key provisions
Let's look at a few important commercial lease provisions from the point of view of the business owner:
- Term: The length of time to which a business should commit in a lease can vary depending on the nature of the site and what type of business will be conducted there, but new or small businesses should probably think on the shorter side until the success of the location is determined. Consider asking for an option to renew so that if all goes well you can stay, but if not you will have an easy exit provision. Try to negotiate reasonable terms like permission to sublet the space or terminate early if your venture goes south before the lease term is up.
- Rent: Determining fair rent can be tricky, but checking out several comparable properties will give you a feel for what the going rate in your market is. Don't hesitate to make this a negotiating point by pointing out comparative prices to brokers, particularly in this sluggish economy.
- Fees and expenses: Look at what costs the landlord wants you to bear. Discuss utilities, insurance, management fees, taxes and maintenance, for example. Also, make sure the landlord is covering any broker's commissions.
- Default: Get as much protection up front as possible to soften the blow and mitigate the consequences should you become unable to make the lease payments. For example, try to negotiate a longer grace period before the lease owner can initiate a forcible detainer action against. Perhaps the lease could provide for a payment plan in such circumstances, or for a so-called "early termination clause" that lets the renter pay a penalty for breaking the lease early, but does not hold it to the lease obligation after that.
- Personal Guarantees: Many landlords will insist that you and your spouse or other related parties personally guaranty the business (corporate or limited liability) lease obligations. Avoid such guarantees if possible, but if the landlord insists upon them, limit their term and qualify them in other ways.
These terms are only a few examples of critical issues to negotiate. Commercial leases can be difficult to understand due to their complexity and it is dangerous to try to negotiate them without the assistance of a qualified lawyer. Be sure to consult an experienced commercial real estate attorney to help you every step of the way. What you pay out in legal expenses for the lease review and negotiation will be returned to you exponentially in the future success of your business.
Article provided by The Law Offices of William D. Black
Visit us at www.thescottsdalelawoffice.com
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The importance of negotiating a good commercial lease for your business
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