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Property Leases: What SMBs Need to Know

Property Leases What SMBs Need to Know

Commercial leases are complicated. These tips will help you sort through the legal jargon.

  • Research is the key to signing the right business lease. Specifically, look at the building owner, landlord, zoning laws, environmental expectations and nuisance laws.
  • Know how much you have to pay, what exactly you’re covering and how much your rent will increase each year. Some leases include extra payments (e.g., utilities, insurance or maintenance), while others fold all of your expenses into one monthly lump sum.
  • Establish details on how your lease will be transferred if your business closes or you move. Two examples are assignment of the lease, which allows another business owner to fully take it over, and subletting.
  • This article is for business owners who are looking to lease a commercial space and want to ensure they understand the contract.– Signing a lease is an important step for any new business owner. Whether you’re opening a shop, moving into an office, or renting manufacturing facilities, at some point you’ll likely need to reserve space for your business. The world of commercial real estate can be complicated, and at times, it can take years to find the space you are looking for.

Once you’ve found that space, signing the contract can feel like an annoying final step before you can go in and focus on running your business. But like most legal agreements, a commercial lease is an important document that requires some research. “You have to do a lot of planning when moving from space to space,” said Walter Gumersell, partner of Rivkin Radler. “Confirm the terms you will accept.” For example, include clauses about rent, security deposit, length of lease, and use of space. “You want it to be as large as possible,” he said.

It should come as no surprise that the fine print in a commercial lease is very important. There are two basic steps to take before signing a lease: do thorough research and be aware of the typical statutes included in commercial lease agreements. The steps for the investigation include finding the owner, determining the building owner, researching zoning laws, and the general idea of ​​the area. Before signing a lease, make sure you have an idea of ​​the payment structure, your personal risk exposure, the relocation facility, the landlord’s desired retention rate, and any annoying clauses in your lease. These are some important things to keep in mind, but keep in mind that typical commercial leasing practices vary by state.

Commercial lease versus residential lease

A commercial lease is required whenever a company rents commercial property for the purpose of conducting business from that location. Nishank Khanna, director of marketing at Clarify Capital, said a commercial lease is a legally binding contract between a landlord and a commercial tenant.

“The landlord agrees to rent the commercial property, which is usually office space, in exchange for money,” Khanna told Business News Daily. “Commercial leases typically last three to five years, creating a long-term relationship between landlord and tenant.”

While it may sound very similar to a residential lease, there are some important distinctions between a residential lease and a commercial lease. For one thing, while both involve a landlord renting space to a tenant for money, a residential lease cannot be used for commercial purposes.

Additionally, “commercial leases are less regulated and offer less protection than residential leases,” Khanna said. “They generally have a longer duration and offer more flexibility when it comes to negotiating terms than residential leases.”

Another difference is that tenants on a residential lease are generally not responsible for paying property taxes, while in commercial leases it is very common for the tenant to pay at least some of the property taxes.

Elements of a commercial lease

A commercial lease is a contract, so it must include some key elements and information to be valid and enforceable. At a minimum, information about the rent, security deposit, length of the lease and any additional costs the tenant may be subject to should be clearly outlined within the lease, according to Khanna.

“The ‘other costs’ category is particularly important and should be carefully reviewed” before the contract is signed, Khanna said. “Construction insurance, property taxes and maintenance costs all come under the umbrella of ‘other costs’. These additional expenses can quickly add up to huge overheads. ”

Khanna also noted that small business owners need to be aware of the difference between exclusive and permitted use. For small business owners in competitive industries, an exclusive use contract can be particularly beneficial.

“An emerging brewery, for example, would be wise to apply for exclusive permission to rent space within a community market in order to reduce competitive sales opportunities,” said Khanna. “Without the exclusive permit, another brewery could rent space within the market and try to win business with the same group of customers, thereby significantly reducing the profits of the first brewery.”

Research the area, owner and rental details

Before signing a commercial lease, you will need to do some research. Make sure you follow the steps below as you investigate .

1. Understand the area.

When searching for a new property, if you are selling a product or service to the public, inspect the area and get an idea of ​​your potential clientele. Location is everything to small business success, so when looking for the right properties, take the time to find the right new home for your business. Gumersell said this process can take two years or more, so be sure to plan accordingly if the end of your current lease is in sight.

2. Get more information about the owner and the owner of the building.

Gumersell also said that one of the most important aspects of the investigation that is often overlooked is learning more about the owner and owner of the building. Sometimes your direct landlord may not be the actual owner of the building. In any case, find out as much as possible about the owner and the owner of the building. You’re starting a business partnership together, so make sure you have an idea of ​​who they are, what their financial situation is, and if they’re paying.

In some states, for example, if a landlord fails to make payments to the building owner or does not make mortgage payments to a bank, the business or tenant may end up being evicted into foreclosure, even if the business of the owner was punctual with every payment. This is just one example of how the relationship between landlord, tenant and building owner can go wrong. Gumersell said companies can conduct a search of public records to find out more about the owner. You can also request documents related to the owner’s limited liability company or business entity to learn more about whether he is an ideal partner for your business.

3. Research the zoning laws.

Another element to investigate are the zoning laws. Although your landlord may designate your space, for example, to run a restaurant, you need to make sure the owner’s goals are consistent with your municipality’s laws. There are scenarios where a building owner or owner may think they can rent their space to a certain type of business, but it doesn’t match the area’s standard zoning laws. By aligning these two details, you can make sure your business can operate without major legal headaches from the city you’re operating in.

4. Find out about the laws against ailments and the environment.

One of the most important aspects of signing a lease is being able to run your business at full capacity once the doors are open. Many leases have extensive points on noise, odors, and equipment. Ann Brookes, a tax attorney, said that when she signed a lease for a restaurant, she had to negotiate an “offensive odor provision.”

“The building rules said there were no offensive odors,” she said. “The fact that a smell is offensive is subjective, so I made sure there was an exception for common restaurant smells.”

It’s also important to research basic environmental laws regarding ownership before signing anything, Gumersell said. Owners often ignore these laws and they could be used against your business.

Important commercial lease statutes to consider

There are a few key points to keep in mind when reviewing the lease. The rental structure is probably the most basic and important aspect of any lease. By determining how much you pay per month, as well as how much your rent will increase each year, you can better determine your budgets and fully understand if you can stay in business in this new space.

The terms of the lease are also very important. Consider short-term versus long-term leases. Long-term leases can be a great investment if you’re opening a business in an emerging or growing area, while short-term leases give you the flexibility to relocate or close your business if it doesn’t work. you expected

Both with payment structure and term, make sure you understand exactly what you’re on the hook for each month. Ask your potential landlord about how the following expenses are paid:

  • Insurance
  • Property taxes
  • Maintenance (both interior and exterior)
  • Repairs
  • Security
  • Parking
  • Local nuisance laws (noise or scent)
  • Utilities (water, gas, electric)
  • Modifications (whether you can adjust the interior or exterior of your space)

Once you’ve established some basic pricing and term structures, it’s time to dive into some of the less-obvious details. While your lease will likely vary by state, here are some good examples of statutes to be aware of before signing a lease:

  • Transfer structure. Iron out how your lease will be transferred if you want to leave the space or your business closes. According to Gumersell, there are generally two structures for transferring a lease: assignment of the lease and subletting. Assignment of the lease means the entire lease is transferred to a new tenant. Subletting is when a current tenant keeps his or her name on the lease but receives payment from a new tenant and transfers that money to the landlord. In both instances, you usually have to establish prior written consent before the lease transfer. This is a very important aspect of your lease to work out.
  • Personal exposure. In some cases, you may be required to sign personal guarantees when you sign a commercial lease. These agreements mean you’re personally on the hook for aspects of the lease even if your business defaults. Work with legal counsel to negotiate this aspect of your contract. If possible, you only want your entity or legal business to take on the risk when signing a business lease.
  • Holdover rent. Holdover rent is a rent increase when a tenant stays after the lease has expired. It’s hard to find a lease, and sometimes when businesses are moving spaces, they end up staying longer than their current lease allows while the new one is being set up. In many contracts, landlords include a clause stating that, in these instances, businesses are responsible for up to 250% of their normal rent payment per month. So, if you stay beyond your allotted time, it could cost you tens of thousands of dollars. Gumersell recommended negotiating this aspect down to around 125%.
  • Nondisturbance agreement. In many cases, if the landlord fails to pay his or her mortgage on the property, your business will still be evicted, even if you’re making all of your payments. With a nondisturbance agreement, if this occurs, you’ll be permitted to stay and continue paying whatever entity has taken over the building from your landlord, Gumersell said.

Everything can be negotiated

While these are some good examples of things to consider, there are likely many aspects of your lease that can be negotiated. Work with your potential landlord and, if necessary, a lawyer, to make sure you get the best deal for you and your business.

“Where a residential lease has a fixed term, a commercial lease is often negotiable and can be for a shorter or longer period depending on the terms,” ​​said Allan Borch, founder of Dotcom Dollar. “Commercial leases also have less legal protections because the consumer laws that apply to residential leases do not cover commercial leases.”

Commercial lease conditions to know

Borch and Dan Bailey, president of WikiLawn, have listed some key terms small business owners should know about commercial leases. The list doesn’t include all of the possible terms you might find in a commercial lease, but it’s an overview of the ones you’ll likely see.

Base rent / rent amount. This amount is calculated based on the square footage of the space. Make sure that the number used by the landlord really represents the usable space. This fee is not dependent on income.

Useful square meters. Refers to the amount of space actually reserved for the business as a tenant, in the case of shared spaces.

The rent goes up. Rent increases are usually based on a percentage of the total rent and can vary from year to year. You can negotiate with your landlord to limit rent increases.

Security deposit. This is the amount to keep the space until the paperwork is completed. The amount must be specified both in advance and in the lease.

Duration of the lease. The length of a commercial lease typically ranges from three to five years, as commercial owners prefer longer lease terms. The lease usually also specifies the start and end dates of the lease. Improvements. This part of the commercial lease sets out the types of improvements and upgrades that can be made to the space and who is responsible for the costs. Many aspects of this section can be negotiated.

Bottom line. Make sure you understand all the terms of a commercial lease and are comfortable with them before signing on the dotted line. Lease grant. This is the clause that provides that the lessor will deliver the property to the tenant once all the conditions have been met (for example the payment of the security deposit) and the tenant accepts the property from the lessor.

Start date. This is the date the tenant takes over the property, more commonly known as the first day the tenant becomes responsible for paying the rent and maintaining the leased property.

Extension. Either party can agree on an extension of the agreement in writing and it must be signed by both parties.

Late fare. If the tenant is late in paying the rent, he will have to pay a late fee which is outlined in the commercial lease. It can be a flat rate or a percentage of the monthly rent.

Taxes. This section describes all taxes associated with the property (property taxes, property taxes) and who is responsible for paying them. Within this section, there may be subtopics such as Contest of Taxes (the tenant can dispute the amount of real estate or personal property tax due), Paying Ordinance Assessments (the tenant generally pays all regular assessments, which they are mandatory). , and overtime, which are by election) and Modification of the taxation method.

Obligation to repair. This section outlines the types of repairs the owner is required to make, such as defects, deficiencies, defects or deviations in materials, which are vital to the operation of the property. It also describes the repairs that tenants are responsible for. Permits. Both parties must acquire all necessary permits and licenses to make improvements or repairs to the rental location.

Patti. These terms are different for the tenant and the landlord; each has a separate set of conventions. For example, an agreement may stipulate that the tenant must pay the rent even if the landlord fails to fulfill some of the tenant’s responsibilities under the lease. Tenant compensation. This clause substantially removes any liability of the lessor for injury, loss, claim or damage, unless such things are the direct result of willful acts or omissions or gross negligence on the part of the lessor.

Rent reduction / adjustment. This section indicates whether the rent will be adjusted or eliminated in the event of property damage caused by fire or other natural disasters.

Condemnation. This clause is often overlooked, but it is important. Determines what happens if a government agency leases the property from the owner for public use, by conviction or eminent domain.

Purchase option. This clause states that, at any time during the lease, the lessee has the right to purchase the property at an agreed price. This clause isn’t mandatory, but it doesn’t hurt to include it. The clause may also state that the tenant does not have the right to purchase the property during the term of the lease. In any case, it is good to have it in writing.

Commercial Leasing FAQs

Commercial leases can be complex. Here are four of the most frequently asked questions about commercial leases and their answers.

What is a typical commercial rental deposit?

It is normal for the rental deposit to include a security deposit and two months’ rent. The average cost is about $ 4,000, according to research by a property management group in Houston.

Are utilities included in commercial leases?

The answer to this question depends on the type of lease. The utility needs of a Skyrise office suite are very different from those of a textile semiconductor manufacturing facility. To simplify the wide variety of existing leases, most commercial leases fall into three categories. A gross lease agreement covers all operating expenses, including utilities. A net lease is less inclusive and generally does not cover utilities. A modified lease can be a gross or net lease, with custom modifications negotiated by both parties.

When to buy or rent a commercial property?

In the long run, owning commercial property is often cheaper than leasing. Leases remain popular because many businesses are unable to devote a significant portion of their capital to commercial real estate. If a company can afford to bond assets into commercial real estate, buying is the best option. If not, leasing is the way to go.

How long does a typical commercial lease last?

Commercial leases are typically three to five years. This ensures sufficient rental income for the owners to recoup their investment. Leases are often negotiable, but for a commercial lease, owners often allow customization of the space for the sake of the rental business. This means that owners invest much more in commercial real estate than in residential real estate.

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