Before You Sign: What to Look For in Your Commercial Lease

Commercial leases are usually written by the landlord (or the landlord’s attorney). Meaning, the terms of the lease are generally going to be landlord-favored. In many cases, one of the smartest business decisions you can make is to hire an attorney before you sign on the dotted line – to review, explain, and/or negotiate lease terms for you.

Regardless of whether you choose to hire an attorney, there are a few common issues that you should look out for:

• Renewal Options (or lack thereof):   You’ve just signed a 3 year lease and you’ve spent about $30,000 upfitting your space for your business. There is no renewal option in your lease. Fast forward 2 ½ years – your landlord is offering you the option to stay in your space under a new lease – but the rent has now doubled. You are probably prepared for gradual increases in your rent per the terms of your lease, but you are in no way prepared to pay double the amount.  You’re left with two options:
  1. Leave at the end of your lease term. This means finding a new space, relocating your business (and hoping your clients/patrons follow you), and probably paying another several thousand dollars to upfit the new space, among other issues.
  2. Stay in your current space and sign a new lease, paying double the rent you’ve been paying for the past 2 ½ years – if you can afford it.

  If you had a renewal option built in to your original lease, you would have known what amount of rental increase to expect, and you could have planned and budgeted for this. (Unless of course the lease renewal provision merely says the parties will negotiate future rent “in good faith”). But, when a commercial lease does not include a renewal option, you may find yourself between a rock and a hard place.

• CAM fees:   Commercial leases always require the tenants to pay their pro rate share of CAM (“Common Area Maintenance”) fees. This lease provision should only pass on actual expenses relating to the operation and maintenance of common areas to the tenants.   Before signing your lease, you should request the building’s CAM fees for the last three years, so that you can compare the expenses (and the annual increase) to other comparable spaces you may want to rent. This will also give you an idea of how the CAM fees may increase over your lease term, if you decide to lease this particular space.   You also want to make sure you know exactly what is included in the CAM fees to make sure this clause is consistent with other parts of the lease that may address what expenses the landlord is solely responsible for.

• Accuracy: Rent is usually determined by an amount per square foot. For a 975 sq. ft. space, that’s an annual (base) rent of $29,250/year (or, $2,437.50/month). What if your space is actually only 900 sq. ft.? The difference is over $2,000/year. And, considering that most commercial leases are at least 3 -5 years long, we’re talking about a hefty ding in your operating budget. Since most annual rent increases are based on your base rent for the initial term, you really want to make sure the base rent is calculated accurately from the beginning.

There are many more issues that can come up in negotiating a commercial lease and many more terms and requirements a tenant should really understand before signing a lease – including escalation clauses, insurance and capital expenditure responsibilities, and remedies for breach, to name a few.  If you have questions regarding your commercial lease, call my office to set up an appointment, let me walk you through it!