Rent is one of the leading causes of business failures. On average, real estate represents between five and ten percent of a business’s overhead that’s second only to labor. What makes this problematic is that almost every other expense can be reduced when business falls off. You can lay off excess staff. You can stop buying supplies and inventory. You can even cut off the telephone and utilities if you go out of business plans. But you can’t stop paying the rent until your lease expires.
Of course, there are some ways around this problem. Savvy entrepreneurs try to avoid giving a personal guarantee to a landlord, or to sign the lease through a separate corporation specifically formed for just that purpose. Retaining the right to sublet gives you a chance to pass the cost along to another business. Unfortunately, commercial leases are so complex and arcane that it’s rare for any entrepreneur to be able to crack their secrets. Even attorneys who don’t specialize in commercial leases can be stymied by their complexity.
For all their intricacy, leases do have one thing going for them.
Whatever you think your problem with a commercial lease is, it’s really this: it restricts your business s freedom to change.
What if my business fails and I’m stuck with a long lease? (or) What if I outgrow my space? (or) What if I’m making a mistake about this space?
Whatever you believe your problem to be it’s really just a presenting problem for this: the lease restricts the ability of you and your business to change.
Leases are a cluster of problems. Among the issues you’ll need to address are: the term of the lease and any options to renew; who signs the document and is therefore legally responsible for rent payment; the accuracy of the lease’s description of the space; pass-along charges; the assign ability of the lease; the landlord’s right to cancel for reasons other than nonpayment of rent; future rent increases; and occupancy date.
No lease is going to be perfect, since you and the landlord are at cross purposes. You want as much freedom and as little responsibility as possible under the agreement. The landlord wants you to be bound as tightly as possible. Rather than trying to “win,” simply do the best you can to get the best deal you can, realizing that the better the space, the more constraints you may need to put up with. If you’re in a business in which location is important, you may need to put up with quite a few restraints to get the kind of space you need to be successful.
The real heavy lifting here should be done by your attorney. However, you still need to know about the issues involved so you can make informed decisions in your discussions with your lawyer.
Short-term leases put you at the landlord’s mercy. If you start to do well, he’ll hold you up for more rent. Long-term leases carry the risk of outliving your business. The solution is often to get a short-term lease with options to renew at affordable rent increases that extend at least as far as your anticipated break-even point, if you’re a start-up.
The rent increases should be described fully, both in terms of amount and timing.
Your lease should be signed by a corporation, not an individual. Even though you’re sure your business will continue to succeed, you must insulate yourself from any personal liability if it fails.
Make sure the lease accurately reflects the square footage of your space. Pay only for “carpetable” space.
Make sure the building’s “pass alongs” the charges for such things as public areas, air-conditioning, heating, taxes, and insurance don’t add up to more than 100 percent of the costs.
Try to get a lease that’s assignable or at least that lets you sublet for “any legal use” or for “general use” by a business similar to your own. Remember that a retailer without an assignable lease can’t sell his business.
Examine any rights the landlord has to cancel the lease for reasons other than your breach of the agreement. Make sure there are specific reasons given for cancellation and you’ll receive adequate compensation based on future values and loss of income.
Finally, an occupancy date should be provided. If the space isn’t delivered “vacant” as promised by that date, then you should have the right to terminate the agreement.
The more you can get a landlord to trust you and your business, the more luck you’ll have in negotiating an advantageous, or at least fair, lease. Commercial landlords are really partners in their tenants’ businesses. When a tenant does well, the landlord does well. And, when a tenant fails, the landlord needs to find another tenant. If you can get your landlord excited about your future, he’s apt to give you enough breathing space to grow. If, on the other hand, the landlord doesn’t have confidence in your future, he’ll try to squeeze as much out of you as he can, as quickly as he can.