Leasing commercial space is a vital stage in the growth of a small business, whether you're expanding or moving to a new location. Commercial leases, on the other hand, can be difficult, with a slew of stipulations and contingencies that have legal and financial ramifications for you and your landlord – as well as the future of your company.
With so much at stake in a lease, reading the fine print and understanding exactly what you're signing is critical. Understanding these areas can assist defend your business interests over the long haul.
Here are five things to think about before signing a commercial property lease for your small business.
1. What Is Included in the Commercial Lease?
The rental rate is always the most crucial factor to consider when selecting a house, but it's also important to understand what that rate entails. Commercial leases exist in a variety of forms, depending on how the tenant is charged for the building's operating expenses. The three most prevalent forms of leases are as follows:
Full-service or gross lease? As the tenant, you would pay a certain monthly rent. All building-related expenses would be covered by the landlord.
Net Lease. The tenant agrees to pay the base rent and additional expenses, which may include the cost of utilities for the leased space and a proportional part of property taxes, insurance, utilities, and common area upkeep fees.
Modified gross lease. This is a cross between a gross and net lease. You would have a gross lease as the tenant, but you would be accountable for certain increases in operational expenses during the lease term.
Make sure you understand the proposed lease arrangement and what you'd be liable for paying as a renter before signing a lease. If you are expected to pay expenditures, ask the landlord for cost predictions to help you plan. You may be able to negotiate better conditions for your company, such as caps to keep spending within a realistic range.
2. What Are the Terms of the Lease and Renewal?
A business lease is normally for five, seven, or ten years, and sometimes for longer. This helps the landlord ensure occupancy and may result in cheaper rental prices over a longer period of time for prospective tenants.
A short-term lease of a year or two may give your company more flexibility. However, you should be prepared for new terms when the lease expires. Discuss the opportunity to renew up front, and have any renewal terms, including the length of the term and how the landlord would compute the renewal rate, fully expressed in the lease paperwork.
Make sure you understand when rental payments begin, especially if a build-out is included in the lease, as well as the deadline for alerting the landlord of your plan to renew or not.
3. Does the Lease Address Improvements?
If you own a dental office, a pet grooming service, a bakery, or another small business, you may wish to make alterations or improvements to personalize the leasing space to work for your business. Negotiating these "build-out" needs, such as custom cabinetry, carpeting, employee cubicles, or pulling down or constructing walls, is a crucial aspect of negotiating a lease agreement.
You'll want the particular improvements that will be made, their cost, who will pay for them, who will own them once completed, and whether the property must be returned to its former state once your lease expires.
4. What Happens If You Need to Terminate Your Lease?
Breaking a lease can be costly. You may be obligated to pay rent for the duration of your lease period, as well as other fines that vary depending on where you live and your state's real estate rules.
To limit your liability, ask to include a break clause in your lease that sets terms for breaking out of the lease, if needed and the particular amount of any penalties you'll need to pay. Negotiate the right to transfer or "assign" your lease to a new owner or sublet all or a portion of your space if you need to relocate or sell your firm.
5. Do You Require Commercial Property Insurance?
To avoid surprises in the event of a lawsuit or loss, make sure your lease explicitly indicates your insurance requirement - the coverage required and who will pay for it. Every lease is unique, but in most circumstances, the landlord obtains insurance for the building and common spaces, whilst the tenant's commercial property insurance covers your particular leased space and its contents. It comprises your company's personal property, such as furniture, equipment, and inventory, as well as any modifications or improvements made to the premises. From a doctor's office with recently remodeled examination rooms to a virtual consulting firm that primarily performs online sessions with customers, the value might vary greatly.
It is critical to understand the exact value of your property. You should select coverage limits that are sufficient to cover the expense of replacing your property if it is damaged or stolen. Otherwise, you may have to pay for anything that exceeds the limitations of your coverage out of pocket.
Remember, as a tenant, liability insurance can protect you from any claims originating from the usage of the premises, such as if an employee or guest slips and falls on the grounds. Furthermore, you will be protected from litigation stemming from your commercial operations.
Navigating a commercial lease can be difficult. A real estate broker can be of great service, but you may also benefit from the unbiased advice of a legal specialist. Also, request that your insurance agent evaluate the lease's insurance conditions to ensure that there are no coverage gaps and that you satisfy your insurance obligations with the protection your business requires.