Attorney Brian Stephenson lays out what every business owner needs to know before signing a lease. Based in Chicago, Brian specializes in real estate, labor and employment, business law and criminal defense. He’s a member of the Rocket Lawyer On Call® network.
I remember going to a carnival when I was a kid. They had a game where you had to throw baseballs at these metal milk bottles. If you knocked them all over you won a prize. As a pitcher, I thought it would be a piece of cake. I remember hurling a fastball at the middle bottle. Instead of knocking it over, the ball bounced right off the bottle. It was at that moment I knew the odds were stacked against me.
When you’re negotiating a commercial lease, think about those metal milk bottles. The nature of the lease is stacked against you. Property owners will always put in as much language as possible to benefit their own interests. You have to be skeptical, and you have to be ready to stand your ground as you negotiate. Remember, unless you’re vying for a storefront in a super-successful location, you have power. The landlord’s alternative is an empty space. Landlords need you more than you need them. You can always walk away and find something else. They, on the other hand, have to start over to get it rented.
The first thing you need to consider is the length of the lease. If you have a new business, you have to consider that it may not take off. If you sign a five-year lease, you could have major headaches. A more practical approach is to agree to a two-year lease with an option to extend for two or three years. That way you can see how it goes. If your business tanks, you can still work something out for the remaining year. Please keep in mind that landlords have a duty to mitigate. That means they can not simply sit back and allow back rent to pile up. They have to take steps to rent the space. In this economy that could be difficult in certain places, but dealing with one year left on a lease is much better than four years on a lease.
If you can, walk into adjoining stores or offices in the same building. Find out how the tenants like renting from this landlord. How reasonable is he or she? Compare the tenants’ square footage to yours, and find out what they are paying. That way you can see if you’re being treated fairly. A red flag is certainly complaints from other tenants about the landlord. Keep in mind that most tenants will complain, but look at the nature of their complaints. If they are adamant that they have been mistreated, you may want to go to another space. If they say that the landlord is fair, you can rest a bit easier. You’re going into business and your landlord is going to be one of the people you’ll be communicating with for years to come. If he or she has a bad reputation, you may want to move on. Remember, you do not have to sign the lease, you can walk away.
Worth a Thousand Words
Before you move in, walk around take pictures and/or video of the entire premises. Bring a witness. If you see signs of prior damage, put it in a letter to the landlord. Include a photo to show that it was pre-existing, and you did not cause this damage.
Keep in mind that you’ll need a liability policy for the premises in case someone slips and falls. You’ll also agree to indemnify the landlord. This means if someone gets injured and sues the landlord, you will provide a defense to the landlord and/or pay any judgment. Check the indemnification language carefully. It should only cover personal injury and damage to property—nothing else. These two matters should be covered under your liability policy, so you should be fine. If there are other matters listed, you need to strike them or review them with your insurance agent if they are covered under your insurance policy.
Also consider what other protection you might need. Take a look around outside. Does the area tend to flood? If so, you may want to get flood insurance. You’ll also need to add the landlord to that policy. Talk to your insurance agent about what other coverage you might need. A second policy will probably be a lot cheaper to add on.
Common (Area) Problems
If you see that your lease has provisions for common areas, you need to flesh them out. If they relate to a small grassy area near your unit, that’s one thing. Perhaps you have to keep it clean or maintain it. Make sure you’re not being held responsible for maintaing the parking lot. If so, you need to strike that. Most personal injuries occur in parking lots on broken asphalt or ice. That should be handled by the landlord. Remember, you are responsible for the area in front of your unit and/or store. As such, it never hurts to put down ice melt in the winter and/or a rubber mat year round to reduce the chances of someone falling.
If your business is unique, you need to make sure that you’ll be able to use for your needs. Will you be running any types of events outside? Will you be running strobe lights or playing music out front? Setting up tables and chairs outside, or placing a placard on the sidewalk? Will you have a generator that blows up an inflatable animal? If so, you need to get it in the lease agreement. If it’s not in the lease, chances are you’re not going to be able to do it. So keep that in mind. Nothing goes outside that’s not agreed upon. When in doubt, bring up the issue during lease negotiations and put it in writing. That way there is no misunderstanding.
Remember, most litigation comes from the gray areas: the things that no one discussed. Put all of your concerns and needs on the table so they can be discussed. The landlord may not care about most of them. If so, put it in writing that they have no objections. Brainstorm. Go over any and everything you plan to do with the space for your business and run them all by the landlord in writing. Put all of your cards on the table.
Pay as You Grow
Lastly, don’t get overly optimistic about how much rent you can afford. If you have a new business, negotiate a price you know you can handle now, not one based on your best-case scenario. Some landlords will agree to a starting price that increases it in six months of a year, so that you can get your business moving and making money. Your rent will be one of—if not the—biggest expense. Make sure you can pay it before you sign on the bottom line.
Be it carnivals or the terms of a commercial lease, be vigilant for opportunities to improve your odds. You must negotiate every item you can. Leases are written to benefit landlords—and they know it. They’re used to tenants pushing back on certain terms, so if something doesn’t feel right to you, change it. It’s your business and your future. Go in with your eyes wide open and your plan in place. A successful business with a fair commercial lease is one of the best scenarios you can hope for as you travel down the path to a bright future.
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