Date: February 16,2020 in For You

By | Shafeek Seddiq

Factors to consider before signing that commercial lease agreement

You formed a new business – restaurant, convenience store, used car dealership, real estate brokerage firm, so on – and now you’re ready to lease a new space and make money. The landlord gives you a 30-page commercial lease contract, most likely drafted by the landlord’s lawyer, and you wonder what to do with it, how to read and understand it.

You also know that rent takes a lot of your initial investment and continued business operation budget, so you want to consider leasing your commercial space carefully. This article outlines some of the key issues or terms you should consider before signing that commercial lease agreement.

Leasing a commercial space depends on many factors including the type of business, your long- and short-term goals, the neighborhood, size of the space and your budget. Still, before you consider signing that agreement, consider some of the most important terms outlined below. Remember, in Virginia, commercial leases are governed by common law, in the form of contracts, and not governed by statute.

Key terms to consider in a commercial lease agreement

 

1. Rent: Regular payment to the landlord. Pay attention to the amount and make sure it is what you expected over the term of the lease, i.e. 3 or 5 years with option years, the acceleration clause, grace period for late fees and penalties.
2. Premises: The space you are renting. Get the blueprint of the space, especially if you are in common area type of space, i.e. shopping mall, to ensure the space is what you are getting.
3. Use of Demised Premises: Another item to watch out for is the usage of the space. Understand that you can conduct your business in that space, and perhaps learn if you can offer other services and products other than the one for which you are getting this space.
4. Maintenance: Generally, the landlord is responsible for structural maintenance of the premises and the tenant is responsible for normal wear and tear. Pay attention to what items (air conditioning, heater, windows, etc.) the lease outlines that the tenant must maintain.
5. Insurances: Depends on a variety of factors; the lease may require several different types of insurances the tenant must get to protect the landlord. So, pay close attention to the insurance clause on what coverage it requires you to provide, which varies from the more common property damage and liability coverage, to the more specific loss of rent or business interruption coverage.
6. Security Deposit: Sum of money required at the start of a lease agreement. This is a tricky one as there is no limit on the amount of deposit a landlord could ask for in Virginia. The landlord would want to receive as much security from the tenant to recoup its costs in case of default or otherwise. You should then leverage the amount of deposit you can afford and willing to pay the landlord to get other concessions, i.e. improvement cost, free first month’s rent, reduced or eliminate personal guarantee.
7. Notice to Cure: The landlord will issue you one if you violate a term in the lease agreement. No one is perfect, and we all make mistakes. For this reason, it makes sense to ensure that a reasonable time period is given to you to remedy the problem. A notice to cure of 3 or 5 days, especially if the notice is given in writing and by mail, is not a reasonable time period for solo and small business owners. So, make sure you negotiate for a reasonable time period of notice to cure.
8. Release from Lease: To ask the landlord to be released from the lease agreement. It will not be easy as landlords generally want to protect themselves and their money, but it does not hurt to negotiate a release from lease that is based on reasonable factors and terms that are beneficial to both.
9. Personal Guarantees: The landlord will ask for personal guarantees if your business is brand new to ensure they get their money promised in the lease agreement. A personal guarantee is another legal promise you make to the landlord that you will pay from your personal assets if your company is unable to pay the rent or any other cost outlined in the lease agreement. It is always a good idea to negotiate terms to limit your risk of personal guarantee, i.e. specify a point that will trigger it, decrease it with improved business performance, specify terms of relief, etc.

Conclusion and Recommendations

There are more terms worth considering when negotiating a commercial lease, and the above key terms also depend on several other factors, but these paint a good picture of what to look out for. The landlord usually has the upper hand, but consider the following situations when negotiating a commercial lease agreement:

 

1. The current economy and commercial lease market in Virginia, but particularly in the city and county of where you are thinking of opening your business. It allows you to determine how much negotiation you can do.
2. Your long and short-term goals for the business, i.e. expand or contract your business.
3. The nature of your business, including your customer base, clients exclusive to that city, town, county.
4. Cost of moving and relocation.
5. Goodwill of your business.

It is also recommended for solo and small business owners to understand the basics of commercial leases. Understand how to work with real estate agents, landlord’s agents and attorneys. Most importantly, learn about the standard lease which may enable you to negotiate with landlords on key terms such as rent, space, use restrictions, maintenance cost and personal guarantee.

As mentioned, commercial leases are typically one-sided and favor the landlord. It is prudent to engage an attorney to advise, counsel, and negotiate these leases on your behalf that may save you and your business from future headaches and possible business failure.

I would be happy to advice, counsel, review, draft or negotiate on your behalf your existing or new commercial lease agreement.

Call me at (703) 558-9311 or visit the website at www.seddiqlawfirm.com to send me a message so that I can set up a free consultation to discuss your specific business goals.