Commercial Leases

As we said last issue, one of the most important and financially significant transactions your business will have is signing a commercial lease. This is the second of 2 newsletters devoted to this topic.

After you’ve done the pre-planning and due diligence, the major concerns in a commercial lease are costs, and rights & liabilities.

The major costs incurred by signing a commercial lease are not always obvious.

Of course, monthly rent is a big one—and under no circumstances should you sign a lease that does not have the monthly rent schedule written out and attached. (Never agree to agree on the rent “later.”) But there are other major costs that are not so obvious:

  • Real estate taxes—your lease will almost certainly say that you are responsible for the portion of the real estate taxes that’s equal to the portion of the building your space is in. In other words, if your space represents 50 % of the whole space in the building the landlord is renting, you will have to pay 50% of the real estate tax. If you’re the only tenant in the whole building, you’ll have to pay 100%. To get an idea of this cost, ask the landlord to give you copies of the real estate tax bills for the last 2 years.
  • Insurance— your lease will almost certainly require you to have insurance. Basic insurance includes general liability—slip-and-fall and similar coverage. Extras include plate glass coverage, hazardous materials coverage, and business interruption insurance (once considered a luxury). You will frequently have to have your landlord as an  “additional named insured”, and you will have to provide the landlord with proof that you’ve gotten all the insurance you have to have; speak to your broker about additional insureds and about proof, which frequently takes the form of an “Accord certificate”.
  • Utilities—utilities can be costly if the space doesn’t have the capacity for the amount of water, electricity, etc. that you need, and therefore has to be upgraded; or if the landlord requires you to install and maintain your own hookup.

Your rights and liabilities are governed solely by the terms of the lease.

This is a big difference from residential leases, which are supplemented by various legal protections for residential tenants. Commercial tenants have no such protection.

That means you are entitled to only what the lease says you are entitled to—including heat and A/C. (So if you need heat or A/C past normal business hours—9:00-5:00—you have to specify that.) In addition, the chances are you will be responsible for upkeep: repairs to plumbing & electricity, sweeping and shoveling sidewalks, garbage disposal and pest control, and more.

And remember: if you assign or sublet part of your space, you will still be liable for rent, utilities, etc. if the assignor or sub-tenant doesn’t pay.

A commercial lease is a complex contract with significant long-term obligations and consequences. We suggest that before you commit your business, you get professional advice about what you are getting into.