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What to look for in a commercial lease?

On Behalf of | Aug 2, 2021 | Real Estate Law |

When it comes to your business, signing on a commercial lease can be a significant investment for your company. For young companies just starting to expand, hire more employees or looking for a storefront, the criteria for a proper commercial lease could be a complicated endeavor. Luckily, there may be more negotiability with the terms of a commercial lease than with a residential one.

Negotiating the terms of a lease agreement

Before discussing the elements of a new lease agreement, you should outline your company’s needs within your potential commercial space before meeting with the owner or real estate agency. Defining the physical demands of your business beforehand can go a long way to improving the clarity in drafting a new lease. The rights that are typically afforded to residential tenants often don’t apply to commercial tenants. Here are some of the facets of commercial leases that you need to know before signing:

  • The entity represented in the lease agreement: Individuals may have different lease terms than LLCs or other business entities. LLCs present some lease risks for landlords, including challenges in enforcing breached lease agreements for dissolved businesses.
  • Subletting and shared spaces: As a matter of mitigating business risk, many tenants pursue a lease clause that would allow them to sublet or have a shared office space to lessen the risk of inadequate revenue early on.
  • Alteration clauses: Many landlords will include specific protocols for making alterations to space, as wells as limitations for what kind of structural or superficial work is permitted.
  • Escalation riders: These lease caveats present an elevated risk to the tenant, who may be responsible for a steep increase in rent due to the landlord’s operating costs or real estate expenses.
  • Eviction language and early termination: For new businesses, the likelihood of financial viability is often more tenuous. A tenant may want to look into providing early termination clauses for themselves. On the other hand, if a landlord seeks a similar option, this could become a financial liability for your business. Commercial tenants don’t share the same rights related to eviction notices as residential tenants. New tenants should watch out for language that makes it easier for a landlord to evict your business.
  • Personal guarantee:  Often if a commercial lease is in the name of a business entity such as an LLC, the landlord will require an individual to sign a personal guarantee.  In such case, the tenant should insist on a “good guy” clause.  The “good guy” clause will relieve the guarantor’s liability if the tenant is about to vacate, advised the landlord of the vacate, has paid all rent to the date of the vacate and leaves the lease space vacant and broom clean.

Finding the most appropriate space for your business

Litigation related to commercial leases often focuses on the lease agreement as the leading indicator of tenant/landlord financial obligations and legal liability. If you’re thinking of expanding to a new workspace, contact an attorney experienced in commercial leases to explore the best options for your business needs.

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