Ask Yourself These Questions Before Signing a Commercial Lease

It's too late to make changes after you've signed a commercial lease for an office building or retail space and the ink has dried. It's vitally important that you understand lease terms, how they'll impact you, and that you've negotiated the best deal possible for yourself before you sign a business lease. This begins with having a working knowledge of terms like "CAM" and arbitration clauses.

Ask yourself these questions so you're sure you know what you're getting into.

Have You Read and Understood the Entire Lease?

Yes, you do need to read it—word for word. It might be a very long and not very interesting document, but you absolutely must know what it's in it.

Many landlords use "standard" or "boilerplate" leases that include general terms that are common to most leases, so make sure terms are included if you've negotiated something different. Make sure that the standard language and your special language don't contradict each other.

Even if the landlord drew up the lease themselves, don't assume that they got everything right. Check the start date, end date, rent, rent escalation terms, and any other special terms you've negotiated for. And above all, be sure you know what you're obligated to do under the lease's terms. What is the landlord obligated to do? Can you terminate the lease?

Have You Negotiated the Best Deal Possible?

It isn't necessarily a done deal just because you've been given a lease for signature. This doesn't mean that any opportunity for negotiation is over. That doesn't happen until the lease has been signed by both parties.

Make a list of all the provisions you don't like as you're reading the lease. Send the list to your potential landlord. You might be surprised by how much they're willing to change.

Do You Understand the CAM Terms?

Most leases use the term "CAM" rather than spell out "common area maintenance." You should be allocated a percentage of the CAM fees you're responsible for. Your fee is based on the percentage of the building you're renting. Be sure the percentage is based upon the overall size of the building and that it doesn't vary based on how much of the building is rented out at any point in time.

The CAM section of a commercial lease is probably one of the most confusing sections and you'll probably be surprised at how much you're paying for. Check to make sure you're not paying for things that relate to the landlord's marketing efforts or legal fees associated with negotiating leases with other tenants.

Other things you might want to strike are any administration fees of more than 3%, paying for benefits for the landlord's employees, and build-out costs for other lease units. You can and should negotiate CAM terms.

Have You Considered Asking for a CAM Stop Lease?

Most leases these days are "triple net" or "net-net-net," meaning that you pay rent plus your proportionate share of CAM fees, property taxes, and often repair and maintenance costs for the property. But you can ask the landlord for a CAM Stop lease so you'll only pay for an increase in CAM fees and property taxes above your initial lease year, often called your "base year."

The landlord might increase your base rental rate in exchange, but it takes a lot of the "mystery fee" out of the rent. Alternatively, you might ask for a cap on the CAM so it can't increase by more than a certain negotiated percent. Pay attention to how and when the CAM fees increase during the term of your lease.

What Is Your Responsibility for Capital Expenditures?

"Capital expenditures" typically refer to major structural expenditures in a commercial lease, such as roof, foundation, HVAC, and other major repairs and replacements. What's "standard" can vary from town to town and property to property, but try to avoid signing any lease that shifts the burden of these repair or replacement costs to you as the tenant.

There are compromises if your landlord is requiring that you pay for these costs. For example, if the lease says that you're responsible for HVAC repair and replacement, you might suggest to the landlord that they strike "replacement" and that your repair obligation be limited to a maintenance contract, maybe two times per year. You could offer to be responsible for all general repairs up to a certain annual maximum amount.

Is the Lease Assignable?

Check to see if the landlord has the right to terminate your lease in the event that you ask for an assignment—the right to have someone else to take on the lease if you sell your business. Many businesses find that their location is a big piece of their value. Some businesses try to assign a lease in order to get out of it, but a landlord will want to renegotiate the terms with the assignee.

It could kill your sale if your landlord has the right to terminate the lease when you ask for an assignment, so request that the landlord remove this provision—or at least allow it to be modified so it doesn't apply to the sale of your business. Understand that the landlord will still want the right to reject the assignment if the new tenant isn't financially acceptable.

Can You Have a Sublessee?

The common practice of taking on a sublessee is similar to the assignment of a lease. A sublessee is another business that works in your lease space under your lease terms. You pay the lease and the other party pays you a portion of the cost.

Many landlords don't allow sublessees, but you might want to share costs with someone down the road. Negotiate with the landlord before you enter into the lease if you think you might want to take on a sublessee at some future point in time.

Does the Lease Have an Arbitration Clause?

Many contracts these days include arbitration clauses. These clauses state that both parties agree to settle any disputes through arbitration rather than litigation and going to court. Read the lease contract to see if the arbitration clause is mandatory. Make sure you have a right to participate in selecting the arbitrator and other decisions for arbitration if it's agreed to.

Will You Need a Personal Guarantee?

Most landlords won't sign unless you personally guarantee the lease, so consider yourself extremely lucky if you can get away with signing a lease without such a clause.

But the nature of guarantees can be negotiable. Consider providing one for only a portion of the lease term, or negotiate for a guarantee that lasts for only six to 12 months after you terminate.

Do You Have Your Business Structure in Place?

You have to make sure your corporate structure is in place if you want it to protect you. File your Articles of Incorporation for a corporation, or make sure you've received your Articles of Organization from the Secretary of State if you're an LLC. Take care of this before you sign a lease. Some states call these documents "certificates."

Make sure you have documentation that states that the lease has been approved by your board of directors. You should have a corporate resolution to show that your board has considered the lease and has approved it. There should still be some documentation that the lease has been approved even if you don't have a board of directors.

The Bottom Line

The landlord will be much more likely to negotiate with you if your lease constitutes 25% of a larger property than if your space is 3%—something you might want to keep in mind. Consider hiring a lawyer to review the document and to help you with the negotiations, particularly if you reach an impasse with the landlord. An attorney can help you decide when to cut and run and when the risk is worth it.

Note

This discussion includes information from Susan Dawson, a partner at Waltz, Palmer, and Dawson LLC.