Signing a commercial lease can be a daunting task for any business owner. A lease agreement is a legally binding document that determines the terms and conditions of the rental agreement between the landlord and the tenant. As a business owner, you want to make sure that the lease agreement meets your business’s needs, protects your interests, and avoids potential disputes.
A thorough commercial lease review is essential to avoid any surprises down the line. This post will provide you with a comprehensive commercial lease review checklist to help you identify potential issues and negotiate the best possible lease terms for your business.
Before we dive into the checklist, let’s take a quick look at some of the common issues that can arise in a commercial lease.
- Rent and Lease Term: The rent and lease term are crucial elements of any commercial lease agreement. It’s essential to ensure that the lease term matches your business’s needs and that the rent is reasonable and competitive for the location.
- Common Area Maintenance (CAM) Charges: CAM charges are fees that tenants pay to maintain common areas in a commercial property, such as lobbies, hallways, and parking lots. It’s essential to review these charges to ensure that they are reasonable and clearly defined in the lease agreement.
- Use and Restrictions: The lease agreement should specify the permitted use of the leased space and any restrictions on how the tenant can use the space. It’s crucial to ensure that the permitted use matches your business’s needs and that any restrictions are reasonable.
- Maintenance and Repairs: The lease agreement should clearly define the responsibilities of the landlord and the tenant for maintaining and repairing the leased space. It’s essential to ensure that these responsibilities are clearly defined and reasonable.
- Security Deposit: The lease agreement should specify the security deposit amount and the conditions for returning the deposit at the end of the lease term. It’s essential to ensure that the security deposit amount is reasonable and that the conditions for returning the deposit are clear and fair.
Now that we’ve looked at some of the common issues that can arise in a commercial lease, let’s dive into the checklist.
1. Lease Term and Rent
- Does the lease term match your business’s needs?
- Is the rent reasonable and competitive for the location?
- Are there any rent increases or rent concessions (i.e. “free rent”) that you can negotiate?
- Do you need any contingencies (e.g., permiting contingencies)?
Example: If your business is new and you are merely testing the market, you may want to negotiate a shorter initial term with options to extend the term. On the flipside, if your business requires extensive upfront costs for you, or you otherwise need a long-term lease, you may want to negotiate a longer initial lease term in exchange for lower rent.
2. CAM Charges
- Are the CAM charges reasonable?
- Are the CAM charges clearly defined in the lease agreement?
- Are there any caps on the CAM charges?
Example: If the landlord wants to pass on the cost of major repairs to the tenants, you may want to negotiate a cap on the CAM charges to avoid unexpected expenses.
3. Use and Restrictions
- Does the permitted use match your business’s needs?
- Are there any restrictions on how you can use the leased space?
- Are there any exclusivity clauses that could limit your ability to compete with other businesses in the building?
Example: If your business requires a specific type of signage, you may want to negotiate a provision that allows you to install the signage without restrictions.
4. Maintenance and Repairs
- Are the responsibilities for maintenance and repairs clearly defined?
- Are the repair and maintenance obligations reasonable?
- Are there any provisions for the landlord to remedy any maintenance or repair issues?
Example 1: If your business operates in a large complex with shared amenities, such as a parking lot, outdoor patio, or landscaped areas, you may want to negotiate a provision that clearly defines the responsibilities for maintaining and repairing these shared areas.
Example 2: If your business operates in a space with a unique layout or design, you may want to negotiate a provision that requires the landlord to maintain and repair these unique features to preserve the functionality and aesthetics of the space.
Example 3: If your business operates in a space with onerous obligations for repair, such as plumbing, electricity, or HVAC systems that are not visible or easily accessible, you may want to negotiate a provision that limits your repair obligations to only those systems that are visible or easily accessible.
5. Security Deposit
- Is the security deposit amount reasonable?
- Are the conditions for returning the security deposit fair?
- Are there any provisions for returning the security deposit?
Example: If the landlord is requesting a higher security deposit than you can afford, you may want to negotiate a lower amount or propose alternative forms of security, such as a letter of credit.
6. Subleasing and Assignment
- Are subleasing and assignment allowed under the lease agreement?
- What are the conditions for subleasing or assigning the lease?
- Are there any fees or restrictions associated with subleasing or assigning the lease?
- If the landlord’s “reasonable” consent is required, is there sufficient clarity as to what constitutes “reasonable” consent or what relevant factors will be considered by the landlord?
- What are the exceptions to landlord’s consent requirement? Affiliate companies?
Example: If you foresee that you may need to leave the space before expiration of the term, you may want to negotiate a flexible provision that allows you to sublease or assign the lease without landlord’s consent in the event the prospective assignee or sublessee meets certain clearly defined criteria.
7. Insurance and Liability
- What insurance coverage is required under the lease agreement?
- Are the insurance requirements reasonable?
- Who is responsible for liability claims?
Example: If your business requires specialized insurance coverage, you may want to negotiate a provision that allows you to obtain the necessary coverage at a reasonable cost.
8. Termination and Renewal
- What are the conditions for terminating or renewing the lease agreement?
- Are there any penalties or fees associated with termination or renewal?
- Are there any renewal options or rights of first refusal?
Example: If your business requires flexibility, you may want to negotiate a provision that allows you to terminate the lease early without penalties or fees.
9. Improvements and Alterations
- Are you allowed to make improvements or alterations to the leased space?
- What are the conditions for making improvements or alterations?
- Who is responsible for the cost of improvements or alterations?
Example: If your business requires significant modifications to the leased space, you may want to negotiate a provision that allows you to make the improvements or alterations at a reasonable cost.
By using this commercial lease review checklist, you can identify potential issues and negotiate the best possible lease terms for your business. Remember to review the lease agreement carefully and consult with legal and financial professionals before signing any lease agreement.
In conclusion, commercial leasing can be a complex process, but with the right tools and knowledge, you can avoid potential disputes and secure a lease agreement that meets your business’s needs. Eliminate the guesswork and take control of your lease agreement with this comprehensive commercial lease review checklist.