Top ten mistakes in commercial leases
A commercial lease is a legally binding document between a landlord and tenant that will govern that relationship during the term of the lease and, in some cases after the tenant has terminated the lease.
It is important that you get it right before signing. Remember, the landlord has a great deal of experience in negotiating the terms of the lease because he or she has done it many times over. On the other hand, this might be your first time ever signing a commercial lease. Below is a list of the top ten mistakes entrepreneurs make with respect to commercial leases and suggestions for avoiding them:
1. Find hidden costs in the rental amount. Do you understand how common area maintenance is calculated? Is there a property management fee? An "upcharge" for third-party vendor work? Are your property taxes included in the rental amount, or is that an additional pass-through? Remember, all the pass-throughs are just additional rent to you, the tenant.
2. Is there enough parking? Just because the shopping center or building is built compliant with the municipal ordinances that does not mean there will enough parking for your employees and customers. How will you handle overflow parking?
3. What is your long-term control of the lease? Generally, sign a short-term lease, with multiple options to extend the lease that are under your control with clearly defined rental increases. The more options you have to extend the lease, the more "long-term control" you have of the premises.
4. Do you have exclusive use rights in the shopping center or in the location that you are opening? In other words, if you are opening an Italian restaurant, can the landlord lease space to another Italian restaurant in the same shopping center? Or in other shopping centers that the landlord owns that are near your location?
5. Understand how tax increases will affect your rental amount and pass-throughs. Generally, you will need to pay a percentage of the tax increases for the property. Have a good understanding of the existing tax bill of the entire property and how much you will be paying. If the shopping center is vacant, the tax bill may be artificially low thus resulting in more severe tax increases as the shopping center is leased up.
6. Understand the Common Area Maintenance ("Cam") calculation carefully. Expenses that are part of the common area are rightfully CAM. Landlord expenses that benefit only one tenant should not be CAM. Landlord expenses that are capitalized i.e., a new parking lot or a new roof, should not be part of CAM but instead, a small amortized portion should be included in CAM.
7. Have a clear understanding of the landlord and tenant responsibilities for repairs and replacements. Typically, the tenant needs to be responsible for repairs of the systems in the premises. If those systems cannot be repaired, replacements are expenses usually borne by the landlord.
8. Be careful if you take the premises "As-Is." If you take the premises as-is you need a building inspector to go through the property and inspect the roof as though you were buying the property, not just leasing it. Also, there can be common area pipes and electrical service that would adversely affect your unit if they were to break. A tenant usually wants a landlord to warrant that the unit is compliant with all federal, state, county and municipal ordinances.
9. Assignment and subletting. Review the assignment clause carefully. Usually, a tenant cannot assign the lease or sublet without landlord consent. Does that fit your business model? What if you were to sell your business? Could you assign the lease to the buyer?
10. Is the landlord asking you to personally guaranty the lease? If it is a new business, the chances are that the landlord will want you to personally guaranty the lease. Do you understand your exposure?
• Kerry M. Lavelle is managing partner of Lavelle Law in Schaumburg, Contact him at (847) 705-7555.