Commercial Leasing
Commercial Leasing Overview
If you are considering renting property for business purposes, consult an experienced real estate attorney. Commercial renters have fewer legal protections than residential tenants, and commercial leases are generally longer than residential leases. Commercial landlords often use leases that were prepared by their attorneys and strongly protect their interests.
The Property
After you have identified a property or an area, consult local authorities to determine whether the zoning is appropriate for the proposed business. In addition to the types of businesses allowed, zoning may impose requirements with respect to parking, signs, hours of operation, truck access, and other matters. Consult the building department too. Make sure that there are no code violations and that the property complies with accessibility requirements to accommodate people with disabilities. Tour the area, noting competing businesses, the visibility of your proposed building, and pedestrian and vehicle traffic patterns.
When you inspect the building’s general condition, look for water intrusion, security features, energy efficiency features, and adequate access for moving any necessary equipment or inventory. Next, consider the whether the business has unique needs for electricity, storage, or water pressure. Consider the likelihood that the business will need additional space in the near future.
Negotiate to have the landlord complete any needed improvements before the move-in date. If the tenant will be making improvements or installing equipment that is not readily removable, make sure that both parties clearly understand what is going to be done and what will be required if the tenant vacates.
Ask for a history of utility, maintenance, and insurance costs. Find out how long past tenants have stayed and why they left.
Financial Concerns
The landlord will be most concerned about the tenant’s ability to pay and should request a credit check. If the proposed business does not have a long history, the landlord might seek additional protection, such as a personal guarantee.
The landlord will also be concerned about committing to a long lease at a fixed rent, when the costs of ownership will likely rise. This is usually addressed by using a “net lease,” which requires the tenant to pay a specific amount of rent plus certain expenses. Many long-term commercial leases, called “triple net” leases, make the tenant responsible for all of the costs most likely to increase—utilities, insurance, maintenance, real estate taxes, and even structural repairs. Under a “double net” lease, the tenant pays utilities, insurance, maintenance, and real estate taxes. The written lease should be very specific about what the tenant is required to pay and how the amounts will be calculated if the tenant is to be billed by the landlord, rather than directly by the provider.
The tenant will, of course, be most concerned with not overpaying, and should investigate rents for comparable area properties. The landlord may be willing to accept a letter of credit instead of requiring a large cash deposit. The tenant may also want to negotiate options to renew at a specified rent at the end of the initial term, or to rent adjoining space owned by the landlord if it becomes available. Moving is expensive and can be harmful to a business with a customer base that depends on location.
The Legalities
Make sure that everything is in the written lease. Never depend on oral promises. Check the description of the space, parking, promised services and amenities (especially shared facilities), the beginning and ending dates, and the identifications of the landlord and tenant. Since commercial leases are usually between businesses, mistakes are surprisingly common. Consider including a noncompetition clause. For example, if you are renting space for a coffee shop, it would be in your best interest to have the landlord promise not to rent space in the same shopping center to another coffee shop. Make sure there are no use restrictions that would prevent possible business changes. For example, would the lease permit that coffee shop to expand to a restaurant with a liquor license?
Finally, anticipate the worst-case scenarios. Make sure that you understand the lease restrictions on assigning or subleasing. Under what circumstances will the lease terminate? What would happen, for example, if the building flooded and became uninhabitable for several weeks?