A commercial lease is the agreement between a landlord and a business that outlines each party’s rights and responsibilities as they pertain to the rental of a property that is to be used for commercial purposes. Commercial leases are distinct from residential leases in that the party renting the property uses the property for business purposes rather than as a place to live. All too often tenants make the mistake of assuming that a standard form commercial lease will not hold any surprises; this assumption can have catastrophic consequences.
Your monthly lease payment may be among the largest outlays for a business. Even if it is not, issues that arise regarding your use or access to the property that you rent may have a significant impact on your ability to effectively operate your business. For businesses that require a physical presence in order to sell their goods or services, a misunderstanding or dispute regarding your lease may effectively put you out of business, and could potentially reach your personal assets. As a result, making the investment in having an experienced business attorney review the terms of your lease can save you from making costly errors.
Even sophisticated business owners that have rented before may have difficulty understanding certain aspects of a commercial lease or may miss details that could have a significant impact on their operations. Below are 4 common issues encountered in negotiating a commercial lease.
4 Common Issues in Negotiating a Commercial Lease
- Making the tenant responsible for certain variable costs – Controlling costs is an essential part of running a profitable business. Consequently, most commercial tenants would likely prefer to be aware of how much they will spend on their lease in given period of time. In some cases, a landlord leasing a commercial property will include provisions that make tenants liable for costs such as property taxes, building repairs, utility payments, or administration and management fees. Failing to identify and understand clauses regarding variable costs can result in an unwelcome financial surprise.
- Inserting an early termination option – Another provision of a lease that could have a significant impact on a commercial tenant’s business is one that allows a landlord to terminate the lease prior to the expiration of its term. In such a lease, a landlord may be able to remove a tenant if he or she receives a better offer for the property or other circumstances exist that incentivize the landlord to terminate the lease.
- Limiting the tenant’s ability to sublease extra space – Many commercial tenants find themselves with extra space in the property they rent as circumstances change. When this occurs, tenants can often generate additional income by subleasing part of their space to another business or individual who needs office space. Some landlords may include clauses in their commercial leases limiting or completely prohibiting a tenant’s ability to sublease part of the property.
- Maintenance Obligations – One of the most common situations that I find result in litigation is the condition of the premises and who has the burden of making repairs. A standard commercial lease usually places a large portion of the burden on the tenant. Often overlooked is the age of the building; taking on this obligation as a tenant will be considerable with a building that is 30 years old, versus a new building. Some leases contain provisions where you take the building “as is”. Not understanding this in a lease will have costly implications.
Contact Structure Law Group to assist with drafting or reviewing your commercial lease.
Business owners who are contemplating entering into a commercial lease agreement should have the lease reviewed by an experienced lawyer prior to executing any agreement. To schedule a consultation, call our office today at (408) 441-7500.
About Structure Law Group, LLP
Structure Law Group is a San Jose based law firm that serves its clients’ business, employment and real estate needs, including but not limited to business formations, debt and equity investments, employment agreements, commercial leasing and purchases, commercial contracts and related litigation.