Congratulations! You have decided that it is in your best business interests to open a brick and mortar location for your business.  After determining your needs, budget, and finding a wonderful location, you are ready to sign a lease.  The landlord’s broker then hands you a 30-page contract. 

Commercial leases can be intimidating documents.  They include indemnification clauses, subrogation clauses, and requests for personal guaranties along with security deposits.  In this two-part series, we include a few of the clauses you may see in your commercial lease and what you should know about them. This is by no means an exhaustive list, and we recommend having an attorney review the terms of your lease and assist you with your negotiations.  

Security Deposits and Personal Guaranties.  In a residential lease, one considers a security deposit to be first, last, and one month’s rent.  While the security deposit for a commercial lease can reflect the same amount, the lease may allow for different use of the deposit.  For example, your deposit may be used during the course of your tenancy for any of the reasons specified in the lease, and you will have a short period of time to replenish that deposit.  

In addition to a security deposit, the landlord may also request personal guaranty.  A personal guaranty is the personal assets of an individual such as their residence, etc.  Consider carving out certain assets like your home and limiting the amount of time that the personal guaranty can be used to satisfy a default (first year of three year lease).  Also, the guarantor should receive notice of the default of the tenant and have an opportunity to cure it before the personal guaranty is attached.

Assignment and Subletting.  These clauses seem pretty straight-forward, but you should understand what is considered to be an assignment or subletting.  Some leases state that a change in ownership structure (like adding a partner or changing your name) is actually a new assignment.  Additionally, some leases state that even your request to sublet or assign your lease to someone else can cause you to default and accelerate the rest of the payments on your lease.

Default.  A default is the failure to comply with one of the terms of your lease.  It is important to understand what is considered a default in your contract.  You should also understand when and how notice of default is to be made.  Some clauses specifically state that no notice of default is required. Further, you should understand your rights to cure (or fix) the default.   Finally, you should be very clear as to the steps the landlord can take based on your default.

Judgment Clauses.  Do you want to give away your right to fight a claim in court? Probably not.  Some states allow a landlord to go to court in some circumstances without notice to you and get an accelerated judgment against you without notice to you or allowing you to fight it.  This is typically called a confession of judgment.  Additionally, language in the lease may also state that you waive your right to appeal an initial determination by a court.

Operating Expenses.  How are operating expenses defined and calculated in your lease?  A landlord usually uses a base year to determine estimated expenses and then it is factored in to your monthly rent payment.  Expenses may be determined based the full occupancy of the entire building and then divided by your share of the premises.  This may be the case even if actually occupancy is significantly less than that.  This amount may also include non-variable costs such as taxes and insurance premiums.  There are many items that one can request not be included in the operating expenses.  A tenant should also make sure that the lease includes the right to review and challenge the calculations.

Your commercial lease is a very substantial contract that can have a significant impact on your business.  This article if for information purposes only and does not constitute legal advice.  Also, there is no intent to create any attorney-client relationship.  You should speak with an attorney licensed to practice law in your state and have them review and perhaps negotiate your commercial lease. 

Alycia KinchloeComment