The process of moving your business into its first office space can be daunting. It isn’t easy to find the right space, in the right location and at the right price. When you finally do, you’re eager to sign on the dotted line, so you can move in as soon as possible. But before you pop the champagne (or keg!), it’s important to understand the critical terms in your lease. Doing your due diligence upfront is important because getting out of a bad lease exposes your business to substantial legal cost and liability.
Below is a short list of the terms to understand for before signing your first commercial lease.
Commercial Lease Terms You Should Know
An obvious, but crucial, part of a lease is its “term.” The lease term describes the length of the lease and its start and end dates. This places your business on the hook for the rent payment for the length of the term. Unless you reserve specific termination clauses (as discussed below), it doesn’t matter whether you want to vacate for growth or downsizing, your business can ultimately be held liable for the remainder of the lease.
The first term that a business owner generally focuses on is the rental price. Despite occupying a business owner’s attention, it’s often possible to lose sight of other clauses that affect the cost associated with renting a space. Commercial leases often contain other expenses, such as utilities, insurance and taxes, that increase your monthly payment. Don’t be caught off guard by “hidden fees” in your lease and ensure that you calculate these costs into your rental estimate before signing a lease.
Improvements and Buildouts
Prior to taking over a new space, your business may require construction to improve or modify the space to suit your needs. It is important that your lease addresses these buildouts--namely who pays for them and who will own them when the lease expires.
Whether a landlord or tenant is responsible for maintenance and repairs varies from lease to lease. These obligations can range from janitorial and handyman (gas, electric, phone, and Internet) services to compliance with building, fire and safety, and other laws and business codes. If a dispute arises over which party bears the burden of these costs, a court will often rely on the agreement in the lease. It is therefore important that you or your lawyer negotiate favorable terms to prevent being held liable for these significant costs.
While the growth of coworking spaces has increased the collaboration between companies, most business owners wouldn’t want to share space or close proximity with a direct competitor. An exclusivity clause limits your landlord ability from leasing neighboring premises to your competitors.
Sublease and Assignment
The sublease clause and assignment clause are crucial rights for business owners to reserve in a lease. Each provides flexibility for your business to vacate its space without breaking your lease. Both allow the tenant to transfer the lease, or part of the lease in the case of a sublease, to a third party tenant. Landlords will often require the ability to consent to any potential sublease or assignment. If you are considering subleasing or assigning space to a third party, it is imperative that you speak with a lawyer. Although sublease and assignment can practically achieve the same result, there are technical legal distinctions that create differences in your continued rights and responsibilities under the lease.
It can be difficult to terminate a lease before the lease term has expired and avoid liability, but there are some provisions that can be included to facilitate an early exit.
- Break: enables you to cancel a lease if income projections haven’t reached a set goal in the given time period.
- Modification: provides that the parties can agree to adjust the term of lease at any time.
- Breach: enables either party to terminate the lease if the other party committed a material breach of the lease.
- Buyout: provides you the option to pay some percentage of the remaining lease in a one-time lump sum payment.
- Acceleration: as a tenant you should be wary of an acceleration clause that would require full performance of the lease once it is terminated.
An experienced attorney can ensure that your lease represents your company’s short and long term interests. In addition, a lawyer can also advise you through your options if your want to terminate the lease or need to default on payment.
Priori Legal is the easiest way to find a high-quality real estate lawyer at below market rates to review and negotiate your lease agreement or advise you on getting out of your lease.
Read more: Company Expansion? Find a Lawyer to Prevent Business Growing Pains