What should I look for when renting a commercial space?
Small business owners should know that commercial leases often fall into the buyer beware category because they have fewer legal protections than residential lease agreements. It is important to do your homework before signing a Commercial Lease Agreement.
One major step is to research the landlord and building area before signing a lease. It can be prudent to see what past tenants and neighbors think about the building owner. You might want to know what the neighborhood is like, check zoning and nuisance laws, and find out if there are any environmental rules that may impact your operations. When reading a Commercial Lease, you may want to consider:
- Length of the lease.
- Common area maintenance fees.
- Landlord and tenant responsibilities.
- Amenities provided.
- Renovation costs.
- Insurance requirements.
- Rent and rent increases.
- Amendment clauses.
- Security deposit terms.
- Limitations on uses for the space.
You might also ask the landlord whether they allow subleases or assignments for other commercial businesses or a franchisor to use the building. This type of deal may be useful if you want or need to sublease for more income or assign the full lease to a new tenant.
What costs do Commercial Leases usually include with rent?
The type of lease you have with the landlord may decide what is or is not included in your commercial rent. Typically, the rent includes a base cost, plus other costs. Other costs might be operating costs, such as utilities or trash removal. The costs included in the rent or charged separately usually depend on the type of property.
There are two main types of Commercial Leases: gross and net. With a gross lease, the tenant usually pays a sum that includes insurance, property taxes, and maintenance costs. A gross lease might be a full-service lease that includes all expenses in the rent amount. Or it might be a modified gross lease, meaning the tenant pays one lump sum, but the landlord and tenant have to work out what it covers.
On the other hand, a net lease can add these expenses on top of the rent. The three main types of net leases include:
- Single net. A single net lease typically includes the rent and a percentage of the property tax.
- Double net. A double net lease includes the base rent plus the tenant's share of the building's property tax and insurance.
- Triple net. In a Triple Net Lease, the tenant pays the insurance, a share of the property tax, and maintenance fees.
What other costs should I consider besides rent?
A small business owner may also be responsible for insurance, property taxes, and maintenance expenses. The amount of property tax a tenant may pay is usually based on the terms of the lease and the value of the commercial space. A landlord may agree to pay all property taxes in the first year of the lease, sometimes called the base year. After that, they may make the tenant pay part of it.
When evaluating a Commercial Lease, the cost of insurance can be a significant factor. While the tenant may pay only part of the total cost, a Commercial Lease may set the exact amount or percentage to be paid. Also, landlords may impose other insurance requirements for tenants to protect the landlord from any tenant damages, accidents, or injuries. In most states, depending on the business, a tenant may also be legally required to have workers' compensation insurance.
Maintenance fees are another expense that might be part of your commercial lease. They may be added to the rent to cover the day-to-day costs of the property. These expenses may be split between the landlord, you, and other tenants based on how much of the square footage you rent. Some of the costs they can cover are utilities, trash removal, landscaping, snow and ice removal, and other types of shared maintenance.
What are the responsibilities of a commercial landlord?
A commercial landlord typically has certain responsibilities. Landlords usually have to pay for routine maintenance such as landscaping and cleaning services. Property owners have a legal duty to maintain their property and keep it safe for visitors and renters. This may include salting icy sidewalks, fixing broken stairs, and taking care of dangerous conditions. The landlord may also pay to fix up the building for a long-term tenant at the start of the lease. But details about who handles labor, payments, and decisions for renovations are usually described in the lease. However, the Commercial Lease often also states exactly what the landlord and the tenant must do to maintain the property.
Who is responsible for improving a commercial space?
The landlord and tenant usually work out who will handle any improvements needed to a commercial space. The improvements are usually defined in the lease. Frequently, the tenant is responsible for improving the space they are renting to suit their business needs. These improvements tend to include things like painting the walls, installing specialty lighting, or special fixtures for their business. These items are called tenant improvements. Also, tenants may be responsible for taking care of things they use within their rented space, such as light fixtures, flooring, and preexisting fixtures. If you prefer, you may be able to plan tenant improvements with your landlord and list them in the lease.
Landlords are often responsible for improving and maintaining common areas. A lease, however, may change who is responsible for what expenses. A landlord or property manager may collect maintenance fees to keep up the common areas and cover other costs. Landlords often have these fees built into the rent. Tenants may negotiate these fees with their landlord before signing an agreement. Grouping fees as controllable or uncontrollable expenses, depending on whether they are fixed or fluctuate, keeps things clear.
Landlords are usually responsible for major repairs due to their expense and potential legal risks. Replacing or repairing the HVAC, roofing, or foundation often involves other tenants or a major disruption to your business. Basically, landlords handle issues that are structural.
Also, landlords are required to meet Americans with Disabilities Act requirements and any building, fire, and safety codes. While a Commercial Lease may shift the financial responsibility to a tenant, a landlord is still legally responsible for violations related to their property. For this reason, landlords typically cover the improvements and maintenance needed to comply with legal requirements, but may seek to recoup these costs from tenants.
Before signing a Commercial Lease, understanding each lease term can save you from making the wrong decision on one of the most important business decisions you make. For help evaluating a Commercial Lease for your business, reach out to a Rocket Lawyer On Call® attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.