Understanding and Reviewing a Commercial Lease
Signing a commercial lease can be a major step for a business and it can be easy to get excited to sign for your dream location. However, it’s an important and expensive decision and so it is essential to read your lease carefully and consult with an attorney if you have any questions or concerns. In this blog post we’ll address some key terms to look out for as you review your lease.
First, look at the length of the lease.
The first thing you want to look for is how long the lease is. Often commercial leases require a longer lease term, such as 3 or 5 years. Before signing on, you want to look at how long your lease is to consider if you want to commit to the time frame.
You also want to see if you can renew your lease. You don’t want to invest a lot of time and energy (and money!) in a space without a plan to know what will happen when the initial lease term ends. In order to avoid not knowing or a drastic rent increase, looking for a renewal clause, or negotiating one if there is not one included, can be an important part of the lease process.
Second, look at the rent terms and payment.
How much rent will you pay each month and when is it due? Will the rent increase each year or stay the same? It is important to know what any rent increase may be, and you may want to consider negotiating it or having language in the lease that limits the ability to increase the rent more than a certain amount. This also relates to the renewal term - you want to make sure you are aware of any rent increase that will apply to a renewal term.
Furthermore, if you are a restaurant, or your space will require substantial build out, you may want to try to negotiate a delay in the first payment of rent to account for the investment you are making in the property while likely not receiving income.
Third, are there other costs you are responsible for?
Commercial leases, more commonly than residential leases, often try to pass more costs onto the tenant. Prospective tenants should look for language that details if tenants are responsible for property taxes, maintenance costs, common area costs, utilities, etc. These can end up adding up and, especially if a building is reassessed, taxes can be quite steep. Reviewing a lease in detail and understanding and possibly negotiating some of these costs can be key.
Also, look to see if the lease requires you accept the property “AS-IS.” If so, you may be required to pay to bring it up to code and meet specific occupancy permit requirements. This can be standard, but it is important to know what costs you may be getting into and if you want to negotiate sharing some of them with the landlord.
Speaking of costs, what are the repair and maintenance terms?
For commercial leases, if the lease says the tenant is responsible for “repair and replacement” of fixtures and aspects of the leased premises, it means that the tenant could have to bear the cost of replacing a water heater or fixing a burst pipe. Reviewing what the tenant is responsible for and whether or not replacement is a requirement of the terms of maintenance is important. Oftentimes a tenant wants to negotiate that the landlord is responsible for more structural repairs and replacements, while a tenant maintains the premises in good repair. Also check out our previous post all about commercial lease repair terms. Remember commercial leases do not have the same protections under the law as residential leases.
Is there a confession of judgment or personal guarantee?
Pennsylvania is one of the few states that allows for confessions of judgement. These are those big scary provisions in caps that are full of legalese.
Essentially, a confession of judgment is a way landlords can circumvent normal court proceedings and avoid a lengthy legal process to enforce a lease if a tenant is in default. Signing such a confession of judgment forfeits any of the rights the tenant has to dispute a landlord’s claim of default. Therefore, the landlord can go to court and enforce the lease without a defense by the tenant. A confession of judgment can be a way for the landlord to get possession of the premises back and/or to collect payment. These can be difficult to negotiate away, but it can be important to try, or to at least limit the ability of the landlord to use the confession of judgment for collection of monies.
A personal guarantee may be required if you are a new business or if the landlord wants more protection for payment. A personal guarantee means that the owner of the business personally agrees to pay the rents and amounts owed under the lease if the business cannot pay. This can be substantial and is important to review and talk through.
Special insurance or other requirements
It is important to review your full lease in detail and see if it has any other specific requirements. Sometimes leases require specific or extensive insurance policies and other provisions. This is where a lawyer can sometimes be helpful to make sure all provisions are understood and there are no surprises.
We hope this has been helpful and we look forward to seeing new shops open and opportunities to come!
DISCLAIMER: This blog post is meant for informational purposes only and does not constitute specific legal advice or create an attorney-client relationship. Readers should discuss their specific situation with an attorney.