A commercial lease can be complex and confusing, especially for businesses that are new to the leasing process. It’s important to understand all of the terms and conditions of your lease before signing on the dotted line. If you don’t, you could be in for some nasty surprises down the road. Before signing a commercial lease, it’s important to understand the following eight things.
1. The Length of the Lease
Most commercial leases are for a term of three to five years, although shorter and longer terms are possible. It’s important to know how long you’re committed to the lease so that you can make plans accordingly. If you need to move out before the end of the lease, you may be responsible for paying a penalty. Additionally, these spaces for businesses are generally leased “as is.” This means that if there are any repairs or upgrades that need to be made, it will be your responsibility to make them. It’s important to factor in the cost of any necessary repairs or renovations when considering a space.
2. The Cost of the Lease
Of course, you’ll need to know how much your lease will cost you each month. In addition to the base rent, there may be additional charges for things like utilities, property taxes, and common area maintenance (CAM). Scott Rubzin, founder of Tiffany Property Investments, suggests asking about all of the potential charges so that you can budget accordingly. Additionally, many commercial leases require a security deposit equal to one or two months’ rent. This deposit is generally refundable, as long as you don’t damage the property or violate the terms of your lease. It’s important to have this money set aside so that you’re not caught off guard when it comes time to move in.
3. The Renewal Process
Kurt Walker, founder of Cream City Home Buyers says that it’s also important to understand the renewal process for your lease. In most cases, you’ll have the option to renew your lease for an additional term at the end of the original lease period. However, the landlord may raise the rent or change other terms and conditions of the lease. If you plan on staying in the space beyond the initial lease period, be sure to ask about the renewal process so that you know what to expect. Additionally, some leases include a clause that allows the landlord to terminate the lease early if certain conditions are met. For example, the landlord may be able to evict you if you violate the terms of your lease.
4. The Use Clause
The use clause is an important part of any commercial lease agreement. This clause dictates how the property can be used. For example, if you’re leasing a retail space, the use clause will likely state that the space can only be used for retail purposes. If you violate the use clause, you could be in violation of your lease. Be sure to familiarize yourself with the use clause before signing a lease so that you know what is and isn’t allowed. Also, be sure to ask about any potential changes to the use clause that may occur over the course of the lease. This is especially important if you’re planning on making any changes to your business.
5. The Assignment Clause
The assignment clause dictates whether or not you’re allowed to assign or sublet the property. In most cases, landlords will only allow assignments or subleases with their written approval. This means that if you need to move out before the end of your lease, you’ll need to find someone else to take over the space. Be sure to ask about the assignment clause before signing your lease so that you know what your options are if you need to move out early. It’s also important to note that the assignment clause may prohibit you from using the space for certain purposes. For example, some landlords won’t allow their tenants to use the space for storage or as a workshop.
6. The Improvements Clause
The improvements clause dictates what, if any, changes you’re allowed to make to the property. In most cases, landlords will only allow changes that are approved in writing. This means that if you want to make any changes to the space, you’ll need to get the landlord’s permission first. Be sure to ask about the improvements clause before signing your lease so that you know what’s allowed. Additionally, be sure to factor in the cost of any necessary improvements when considering a space.
7. The Insurance Clause
Most leases will have an insurance clause that requires the tenant to purchase and maintain a certain amount of liability insurance. This is to protect the landlord in case someone is injured on the property. Typically, the insurance policy must name the landlord as an additional insured. Additionally, the tenant may be required to show proof of insurance to the landlord before moving in. It’s important to read the insurance clause carefully to make sure you understand what is required.
8. The Subordination Clause
The subordination clause is typically included in leases for space that is leased from a larger property owner, such as a mall or an office building. This clause states that your lease is subordinate to the mortgage or deed of trust held by the property owner. If the property owner defaults on their loan, the lender can foreclose on the property and your lease would be terminated. If you are considering leasing space in a property that has a mortgage, be sure to ask the property owner about the status of their loan and whether or not the subordination clause is in effect.
Before signing a commercial lease, be sure to read and understand all of the clauses. Pay special attention to the use clause, the assignment clause, the improvements clause, and the insurance clause. These clauses will dictate what you’re allowed to do with the property and how you can use it. If you have any questions about the lease, be sure to ask the landlord before signing. Once you sign a lease, you’re typically bound by its terms for the duration of the lease, so it’s important that you understand everything before putting your signature on the dotted line.