I may be over-selling this post a bit, but not by much. There’s no doubt for most small businesses and start-ups that the first, and perhaps only, real estate transaction the firm will enter into is a commercial lease. Whether it is for a retail store, manufacturing or studio space, or a restaurant, there are a few things the small business owner should keep in mind while reviewing that first lease.
There is no such thing as a form lease. In all likelihood the Landlord will present you with a lease, pre-printed with your business name and other details inserted, and say it’s his typical form lease. Do not hear the word “form” and assume you can’t negotiate. No doubt the landlord presents the same lease to all prospective tenants – but you know your business, the landlord doesn’t. Read every provision as if it’s open for discussion, and keep in mind the particular needs of your business that are likely not reflected in the form.
“Base Rent” isn’t the only rent. The term that will rightfully be most heavily negotiated in your lease is the base rent – i.e. the fixed amount you pay each month. Even if you get a great deal on base rent, the lease in totality may not be a good business value based on other charges. First, most commercial leases will be “triple net,” a fancy way of saying that the tenant is also responsible for taxes, insurance and operating charges. The most flexible of these are the operating charges. Make sure you’re not being charged for expenses that don’t benefit your space, and that you pay a proportionate amount to other tenants if the space is in a multi-tenant center. Also keep an eye out for “percentage rent.” In leases with percentage rent provisions, the tenant will pay a percentage of its revenue over a certain dollar amount to the landlord. This isn’t necessarily bad for the tenant, as it provides a mutual incentive for landlord and tenant to want the business to succeed, and it may be coupled with a lower base rent. Percentage rent provisions must be reviewed with care though.
Notice the notices. Once you sign your lease and move in, keep the lease in a place where it’s easy to reference. Consider drafting a quick lease summary, possibly with the assistance of your attorney, which reminds you of critical dates and costs under the lease. Many sections of the lease will have requirements for the tenant to give notice to the landlord. For example, if you have the option of renewing your lease a notice will undoubtedly be required, sometimes as much as a year in advance of lease expiration. The tenant must follow the notice requirements precisely to avoid forfeiting its right to any option periods.
Of course these brief provisions are not the only things to keep in mind when reviewing your small business’s first lease. It’s always advisable to make the small investment to have your attorney review the lease before signing. But by keeping the above advice in mind you can avoid some of the most common leasing mistakes made by small businesses.