This post by Drinkwater Law Offices
Entering into a commercial lease is one of the first steps entrepreneurs take when opening a new business or a new location. The lease process involves many important decisions, not only assessing the viability of the physical location, but also the provisions contained in the lease document. It is important to remember that not all leases are created equal. In fact, many provisions in a lease may appear harmless, but can have significant ramifications to your business and its operations.
Term and Renewal Periods
For a new business, a shorter initial term with several optional periods for renewal provides the most flexibility. Not only does a
shorter initial term limit the exposure if the new business does not do as well as planned, but it can also provide flexibility to the new business if it is so successful that the premises is no longer functional for its operations. Further, renewal terms should always establish a future lease rate. Failure to establish a method to calculate future increases can result in disagreements when the initial term expires.
Use and Exclusivity
The use provision should clearly identify all of the expected business activities, while at the same time, not limit future expansion. This provision does not ensure that zoning and other laws allow for the businesses use. It is the tenant’s responsibility to check into these items before the lease is executed. In addition, the Landlord should provide an exclusivity clause which protects against the leasing of space to another tenant who would directly compete against the business. This provides protection of the customer base and also protects your Landlord against vacancies from business failures that such direct competition may cause.
Personal guarantees are generally standard for new business leases. These guarantees make the guarantor personally liable for the lease in the event that the business is not able to meet the obligations of the lease.
Maintenance and Repair
The lease should always clearly identify the parties responsible for maintenance and repairs. Generally in multi-tenant locations, the tenant is responsible for the maintenance and repair of the interior of the premises and the landlord is responsible for the outside and common areas, including all structural components. Additionally, the tenant generally has to return the premises to the condition it was in at the beginning of the lease term, excluding normal wear and tear.
These are only a few of the items to be aware of in any lease. The most important thing to remember is that nothing is a substitute to having an experienced attorney review your lease.