As a prospective buyer of an existing business, it is vital to review the commercial lease agreement before making a purchase. Ignoring this step can lead to a nightmare situation that can put your investment in jeopardy. In this article, we’ll discuss the importance of reviewing the commercial lease, provide examples of lease provisions to scrutinize, and dive deeper into the implications of different clauses.
- Rent escalation clauses: This clause outlines how and when the rent will increase over time. Failing to negotiate with the landlord could leave you with a rent increase that may be difficult to manage financially. This clause may include a fixed amount or a percentage increase, and it’s essential to understand how the rent escalation will impact your business’s profitability over time. Negotiating with the landlord can help you secure more favorable rent escalation terms, such as capping the increase at a specific amount or limiting the frequency of increases.
- Subleasing clauses: This clause outlines whether the tenant can sublease the premises to a third party. In some cases, the landlord may prohibit subleasing, which could limit your ability to generate income by renting out a portion of the space. Alternatively, the landlord may allow subleasing but may require their consent before you can lease the space to a third party. This clause is crucial to understand, as it can impact your ability to generate revenue and manage your space.
- Repair and maintenance clauses: This clause outlines the responsibilities of the landlord and the tenant when it comes to repairing and maintaining the premises. In some cases, the landlord may shift the burden of maintenance and repair onto the tenant, which could result in significant expenses. Understanding this clause is essential, as it can impact your ongoing costs and maintenance responsibilities. Negotiating with the landlord to limit your repair and maintenance responsibilities can help you minimize costs and ensure that the space remains in good condition.
- Assignment clauses: This clause outlines whether the tenant can assign the lease to a new tenant. In some cases, the landlord may require the tenant to obtain their consent before assigning the lease. Failing to negotiate this provision could leave you with limited options if you need to assign the lease to a new tenant in the future. This clause is critical to understand, as it can impact your ability to sell the business or transfer ownership to a new party. Negotiating with the landlord to obtain more flexible assignment terms can help you protect your interests and ensure the success of your business.
- Extension Options: Extension options are another critical lease provision that buyers of an existing business should be aware of. An extension option is a clause in the lease agreement that allows the tenant to extend the lease for a specified period. However, it’s important to note that many commercial leases expressly provide that the option to extend is only exercisable by the original tenant, and it is not transferable to the buyer of the business as a successor tenant. This means that if you’re buying an existing business with an extension option, you may not be able to extend the lease when it expires. Instead, you may need to renegotiate the lease terms with the landlord, which could result in higher rent or less favorable terms. To avoid this situation, it’s crucial to review the lease agreement carefully and determine whether the extension option is transferable. If the option is not transferable, you may need to negotiate with the landlord to ensure that you have the option to extend the lease when it expires. If you’re unable to negotiate transferable extension options, you may want to consider negotiating a longer initial lease term. A longer initial lease term can provide more security for your business and allow you to plan for the future more effectively.
In short, reviewing the commercial lease agreement is essential before buying an existing business. Different lease clauses can impact your profitability, maintenance responsibilities, and ability to manage the space. Understanding and negotiating these clauses with the landlord can help you secure more favorable terms and protect your interests. Extension options are a critical lease provision that may not be transferable to the buyer of the business as a successor tenant. Understanding and negotiating these clauses with the landlord can help you secure more favorable terms and protect your interests. Seeking legal advice can help you navigate any complex or challenging lease provisions, ensuring that you make informed decisions and avoid costly mistakes.