The Terms and Provisions of a Commercial Lease Can Significantly Impact Your Business
Posted: Jan 06, 2020
Commercial lease agreements are distinct from more common types of lease agreements. For example, a commercial lease usually features a much longer term (e.g., some lease agreements can last for decades), require large monthly payments and often include clauses and provisions that could expose your business to large expenditures (e.g. having to pay for expenses associated with the upkeep of a common area that may be shared with other businesses). As a business owner, you need to have a working knowledge of the key provisions within a commercial lease to ensure you are entering into an agreement that does not haunt you years down the road.
Here are some important issues you need to consider when assessing whether it makes sense to sign a commercial lease for your business, or whether you should look elsewhere for office space.
Consider the Size of the Security Deposit
As a business owner, it’s never advantageous to have a big chunk of your money tied up. Unfortunately, many landlords often require large security deposits because it helps them manage the risk of default on long-term leases. If your potential landlord insists on a significant deposit, try to get them to compromise by offering to pay the first three months of rent in advance in exchange for a lower security deposit. This way your money isn’t simply being held for security purposes.
If you have little to no credit, however, the landlord may be concerned your startup funds will dry up before the end of the lease term and won’t want to compromise on the amount of the deposit. (This is often the thinking behind commercial space for tech startups in the Bay Area.) Under these circumstances, a landlord is unlikely to accept advance rent in exchange for a lower deposit. However, they might consider a schedule that involves releasing some of the deposit back to you yearly after you’ve proved that you’re not at risk of default.
Restrictions on Space Availability or Access for Your Company
It is common for a commercial lease agreement to expressly limit the permitted uses of the leased space for your business. However, you need to make sure the language in this section is not too restrictive. For example, you should retain the flexibility to sublease the space, if needed. You should also look for a commercial lease that affords you the ability to use the premises for any business office purpose.
Watch Out If You are Entering Into a Subordinate Lease
If the commercial lease has language indicating that it is made "subordinate to an encumbrance" you need to be extremely cautious and understand the ramifications of this language. Basically, this means that your lease is subordinate to another financial interest in the property. For example, if the office building has a mortgage, then your lease could potentially be terminated if there is a foreclosure on the encumbrance. This can be a particularly frustrating experience, especially if you are a perfect tenant who pays the rent on time every month, but the tenants around you fail to pay on time and send the building owner into foreclosure.
If there is an encumbrance in place at the time you sign the commercial lease, consider negotiating a non-disturbance provision with the beneficiary of the encumbrance, such as the financial institution that owns the encumbrance. A non-disturbance provision basically states your business will be allowed to remain in the leased space as long as you comply with the terms of the lease.
Subsequent Sale of the Building
In addition to the risk of foreclosure, you should consider the potential likelihood of the landlord selling the building to another party. If this occurs, you could wind up having to pay additional property taxes. Prior to signing the commercial lease, it would be prudent to investigate when the last reassessment occurred and negotiate the inclusion of a provision that limits a tax payment increase if there is a reassessment after the sale of the property.
Speak to an Experienced Business Lawyer
As you can see, the terms and provisions of a commercial lease can significantly impact your business. Hence, it is in your best interest to have the lease language reviewed by a skilled and knowledgeable business contract lawyer in Los Angeles who can advise you as to whether the agreement makes sense for your business.
George Anderson is a freelance writer, blogger, and entrepreneur. I love reading, outdoor activities, traveling and staying current with new trends