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What to Consider When Signing A Commercial Lease

I’M LEASING COMMERCIAL SPACE. WHAT HIDDEN PITFALLS SHOULD I LOOK OUT FOR?

So, you have your new lease in hand. It’s probably long, and it looks pretty boring.  You Commercial Space Leasesmay think that the terms are all standard and you don’t need to look through them.  Wrong!  Make sure that you spend the time, hopefully with help from a real estate attorney, to go through the whole lease.   There are a few issues in leases that everyone knows to look out for– like base rent and length of lease.  But there are some hidden pitfalls that you may not have even considered.

What Is Permitted Use?

This clause describes what the space can be used for.  I’ve had clients just skip over this part—they assume that since their company name is Ryan’s Tacos, that they will be allowed to use the space as a Mexican Restaurant.  However, unless the lease specifically allows for this, the Landlord can forbid you from this use.  Make sure that the Permitted Use clause has a clear description of your business without too many limitations.  Here is an example of a good permitted use clause:  “Tenant may use the Premises for the sale of Mexican food (with eat in, catering and take out services), t-shirts, hats, mugs and other related items.”

What are CAM Fees?

Many leases require you to pay base rent plus additional rent (which usually includes Common Area Maintenance Fees (CAM Fees)).  The Landlord has expenses to maintain and operate its building.  The CAM Fees are the tenant’s portion of these expenses.  CAM Fees are not standard from lease to lease and should be reviewed carefully.  You will want to make sure that you understand what you’re paying for.  For example, will the full cost of a new roof be added into next year’s CAM Fees if the roof needs to be replaced?  Will you pay a larger portion of the CAM Fees if the building is not fully occupied?  If you can, you may want to negotiate a cap on the CAM Fees you pay each month, or limit the expenses to what is reasonable.  You may also want to specify that your portion of the CAM Fees are not dependent on the occupancy of the building.

Who is Responsible for Maintenance?

Again, this sounds like it should be a no-brainer.  If the Landlord owns the building, shouldn’t he be responsible for maintaining the building?  This is not standard in all leases. So, you’ll want to review these clauses carefully.  At a minimum,  you should request that the Landlord maintain the structural components of your space (including ceilings, walls and roof), the exterior, the common areas and,  if possible, also maintain shared building systems, including plumbing and the HVAC system.

Is there a Guaranty Included?

Landlords will often request that you and one or more of your owners sign a personal guaranty.  A personal guaranty basically says that if the tenant-company doesn’t make all payments under the lease or has other liabilities connected with the space, that you will be personally liable for all of these amounts.  You may not be able to negotiate the lease without this guaranty, but you can try to limit its reach.  For example, you may want to ask for the guaranty to expire in a certain amount of time (maybe 2-3 years), if you there are not defaults under the lease, or have the guaranty limited to a certain set amount of rent.

Are There Any Franchise Specific Requirements?

If you have a franchised business, there are additional issues for you to think about when you are signing a lease.  The Franchise Agreement that you have signed generally has specific obligations that relate to the lease, and in order for you to stay in good standing with your Franchisor, you’ll need to make sure that these obligations are also in your lease.   For example, you’ll need to have specific language in your transfer clauses,  in your default clauses and other miscellaneous clauses.

A good real estate lawyer can help you save a lot of money later if you negotiate your lease properly.  If you have any questions about your commercial lease, or would like a qualified attorney to review your lease before signing, please contact Corporon & Katz today, we would be happy to assist.  We can be reached at 1-888-780-0910 or via email at Michael@BusinessLawyer.com.

 

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