YOUR SMALL BUSINESS LEASE

When renting commercial space the small business lease can often become a major problem if it is not carefully drafted. Those pieces of paper that contain so much fine print and are generally made out to the landlord’s advantage, are the problem.

Like everything in life, the unfamiliar makes one wary and so it is with a lease. Learn something about small business leasing; know what you want and you can negotiate a lease that is fair to both tenant and landlord.

No one wants to be bitten by signing a bad small business lease agreement, so here are a few tips on how to ensure that you don’t.

The Lease

Whether you need to rent an office, retail space or a factory, you will be presented with a lease to sign.

These are the things to do when presented with a lease and before signing it:-

1. All leases must be read carefully and completely so tell the landlord that you will take the lease away and return with your comments and questions, once you have read it.

   This can be time-consuming and difficult if you do not understand the lease terms, but it is a must.

2. Take the small business lease away and read it thoroughly, making notes of all those items that you are unsure of or do not understand.
3. List those items that you would like included in the lease. (see below). All leases are open to negotiation and landlords expect this, so list all the items you would want in the lease. You might be surprised at how many are agreed to.
4. Be prepared to negotiate the lease with the landlord and clearly note any agreed changes. The landlord or his attorney will normally draw up the lease with the agreed changes and a copy will come to you for checking.
5. If you are happy so far, take this copy to your lawyer for his comments. If he has specialist knowledge in real estate, so much the better.
6. Once you are happy with the small business lease, it can be signed.

Let’s now look at what was needed to get to this point.

Look before you leap

Before looking for rental space, it is wise to know what you are going to need in the way of space and facilities. Give this some thought, taking into account your projected growth needs. Decide how long you need to lease for, remembering that very long leases lock you in, which might not be a good idea.

Your decision to rent a premises for your business needs to be right, so spend time on getting it right.

You now know what you want and have found some possibles. Now come the negotiations, building up to your signing of a small business lease.

Lease Contracts and What to Check For

You need to be aware of and check that the following items are covered in your lease.

1. What usable floor space are you getting? Don’t rely on the landlord’s measurements, check for yourself to ensure you will be paying for actual space and not fictitious space!

   If there are any common areas, for example in an office block, ensure that you are only paying for your share. Remember that you will also be paying rental on such areas which increases the cost per square unit of your usable area.

2. If there are any common maintenance charges on which you pay your pro-rata share, make sure that they do not also include the landlord’s maintenance responsibilities. Landlords tend to load these expenses.
3. Rents are always negotiable, but be careful to understand how the rent is made up. Is the rent based also on factors of the landlords other expenses, such as land taxes, insurance, etc. Are these factors on which your rent will be based fair?
4. Who is responsible for repairs and maintenance? Who is responsible for what; make sure that you are not agreeing to pay for R & M that should be the landlord’s responsibility.
5. Payment for and recording of utility costs can cause problems if not laid down in your lease. If you are paying for electricity, gas, water and sewage are they metered? Is it a utility meter or the landlord’s sub-meter? Are the costs included in the rent?
6. Who is responsible for the buildings insurance? Does it cover leakage damage to your property?
7. Are you or the landlord responsible for the property taxes? Be real careful here that you don’t agree to pay for taxes into the future, such as those that can arise from a change of ownership.
8. If you wish to erect any signage, make sure that the sizes and types are agreed to in the small business lease.
9. Make sure that your business can legally operate out of the leased premises. Check with the health and fire departments as well as the city’s zoning and building departments.
10. Ensure that you are not going to be held responsible for any past or future infringement of laws regarding the buildings. Get it stated in the lease that the buildings are in compliance with all existing laws and regulations.
11. If you require certain alterations done to the buildings, these should be negotiated with the landlord. Where the landlord is responsible for the alterations or improvements, make sure that you only start paying the rent then they are complete.

    On the expiration of your small business lease will you have to restore the building to its former state? Who will pay for this?

12. Security is of increasing importance. Do you need to secure the premises or employee security guards? If so negotiate the responsibilities for costs.
13. Include the provision that you are able to sublet or assign the premises if for some reason you want to move out.

    If you decide to close the business or move to larger premises you don’t want to be left paying the rent on an empty building until the lease expires.

14. If by some chance your leased building is destroyed or damaged will you still be responsible for the full rent?

    If the building cannot be used by you for its purpose, then you and your landlord must have the right of termination.

    If only partially damaged, but still usable, the rent must be reduced or abated.

15. Be aware that many small business leases fail to mention any tenant rights. The law provides tenant rights which if you are not careful will be waived or not mentioned at all.

    Try and negotiate to keep as many of these rights as possible included in the lease.

16. Make sure that a written description of the premises is included in the lease. This should include a drawing and details of buildings, roofing, etc.
17. Remember to find out who owns the building that you wish to lease. Is it the landlord or his bank?

    If it is his bank, insist that he gets you a non-disturbance agreement from the bank that will allow you to remain in the building even if your landlord defaults, provided you pay the rent of course.

18. Be careful about the terms of your small business lease in regard to the length of the lease.

    A long term lease can be a real liability if circumstances change or something goes wrong. A short term lease is also a potential problem if you are forced to leave before you want to or are ready.

    The ideal lease length is, in my opinion, a short two or three year lease, with plenty of three year renewal options. Also tie up your rent increases at this time if possible.

19. Where you will be renting retail space build in a few bail-out clauses that, for example, allows you to cancel your lease if your sales are not as expected, or if the anchor store in the area moves or closes down.
20. If you are to rent in a shopping center, you will need protection from competition, so restrict the landlord from leasing to competing businesses.
21. Beware of restrictive leases that limit what you can do or sell. You might start in business as a clothing boutique but want to change to a sports outlet because it has better potential. Get the widest definition you can in the lease as to what and what not you can do.

The lists of items that can be found in any commercial small business lease are endless. It is my opinion that landlords, and I have been one, include everything that they can think of in a lease.

This makes the lease very long and a real bore to read, so most tenants never read their leases. Just what the landlord wants!

In 95% of cases, no lease is ever looked at again from the day it was signed to the day it expires. But the day something goes wrong, or you do something not liked by the landlord, out it comes and there it is, clause 53D, stating that you are at fault.

Read the draft small business lease, negotiate it, with everything being subject to negotiation and then, after your lawyer has approved its terms and conditions sign it.

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