Don’t let a bad commercial lease ruin your business

Nowadays, many people decide to strike out on their own and start their own businesses. If you are of the same mind, you obviously need a place to conduct your business. If buying a site is out of your price range, renting is a popular option. However, in order to rent a space for your business, you will need a commercial lease agreement. Since an unfavorable commercial lease can needlessly cost your business a significant amount of money (and may contribute to its ultimate failure), it is important to have a basic understanding of commercial leases before you begin the negotiations process.

You may assume that commercial leases work the same way as residential leases. However, commercial leases are quite different from residential leases in several ways including:

Protection: Commercial renters do not enjoy the same legal protections (e.g. consumer protection laws) as residential lessees.

Language of agreement: Unlike many residential leases, commercial leases often do not follow a standard form. As a result, many lease agreement provided by landlords are worded to favor their interests.

Flexibility: Since there is no standard form and fewer legal prohibitions, commercial leases are flexible and can be negotiated to include (or exclude) a wide variety of duties and obligations for both parties.

Enforceability: In general, commercial leases are significantly harder to get out of than residential leases. As a result, an unfavorable agreement can be binding on a business for a long period.

Watch out for three common mistakes

One of the most important aspects of commercial leases is rent. Since you, the business owner, may want the lowest rent, you may be tempted to sign a longer lease term. However, since it is more difficult to break a commercial lease, this is not advised, since the needs of your business may significantly change during a long lease term. In general, it is better to sign a one or two-year lease with an option to renew, even if it is more expensive, as your needs and means are more foreseeable over the short term.

Another common mistake made by commercial lessees is neglecting to consider how the lease allocates expenses prior to signing. Potentially, the contract offered by the landlord may try to shift all expenses such as repairs, maintenance, property improvements and costs to comply with codes and laws (e.g. the Americans with Disabilities Act) onto the tenant. Since these costs occur randomly and cannot be accurately estimated in many cases, they can be a significant drain on your business.

Finally, many commercial lessees do not always consider what would happen if the needs or financial abilities of the business changes during the lease. Since most commercial leases cannot be walked away from, it is helpful for you to negotiate certain clauses to protect your business. An assignment and sublet clause, for example, can allow you to sublet your space to another business if it becomes unaffordable or no longer suitable. Another common clause that can protect the vitality of your business is an exclusivity clause. This prohibits your landlord from renting adjacent or nearby units to your competitors or similar businesses.

An attorney can help you

These are just a sample of the potential pitfalls that await the unwary commercial tenant. When you are considering a space for your business, it is a wise move to not just rely on the advice of your broker, who does not always have your best interests in mind. An experienced real estate attorney can assist you during the lease negotiation process and ensure that the final terms of your lease are fair and protect the concerns of your business.

  • New Mexico Board of Legal Specialization
  • NMLTA
  • Member of Community Associations Institute