BEFORE YOU SIGN THAT COMMERCIAL LEASE: THE PROVISIONS THAT CAN COST YOUR BUSINESS FAR MORE THAN THE RENT

For many businesses, the largest financial commitment they will make is not a loan or equipment purchase.

It is the lease. A five-year or ten-year commercial lease can obligate a business to pay hundreds of thousands—or millions—of dollars.

The premises may also become central to the company's identity. Customers learn the location. Employees organize their lives around it. Equipment is installed. Signs are erected. Improvements are constructed. The company's goodwill can become tied to the property.

Yet business owners sometimes negotiate commercial leases as though the only important number is the monthly rent.

It is not.

At Elkhalil Law, P.C., we encourage commercial tenants to evaluate a lease as a long-term business contract rather than simply permission to occupy space. The real question is not “How much is the rent?” It is “What is this location actually obligating my business to do for the next several years?”

Calculate the Real Occupancy Cost

The stated rent may be only the beginning.

Commercial tenants may be responsible for some combination of common-area maintenance charges, taxes, insurance, utilities, maintenance, repairs, management costs, and other operating expenses.

Those additional charges can materially affect the economics of the location.

Before signing, understand what is included, what is excluded, how pass-through expenses are calculated, whether there are caps or exclusions, and whether the tenant has rights to review or audit charges.

A seemingly inexpensive lease can become expensive when additional obligations are added.

Determine Who Repairs What

Repair obligations deserve close attention.

Who is responsible for the HVAC system?

Plumbing?

Electrical systems?

Roof?

Structural components?

Windows?

Parking areas?

Building systems?

Suppose the air-conditioning system fails six months after opening and replacement costs $40,000.

Who pays?

The answer should not first be discovered after the system stops working.

The lease should allocate repair and replacement responsibilities clearly.

Negotiate Assignment and Subleasing Before You Need Them

Businesses change faster than commercial leases.

A company may outgrow its space.

Move operations online.

Need to downsize.

Be acquired.

Sell a division.

Merge with another company.

Relocate to another state.

If the lease severely restricts assignment and subleasing, the tenant may remain obligated to pay rent on space it no longer needs.

Assignment and subleasing rights are therefore not merely exit clauses.

They are business-flexibility provisions.

Pay particular attention to whether landlord consent is required and whether the landlord has absolute discretion to refuse.

Consider What Happens If You Sell the Business

A business owner may assume a buyer can simply take over the lease.

Not necessarily.

Commercial leases may include change-of-control provisions or broad definitions of assignment.

A transaction involving the ownership of the tenant entity can therefore potentially implicate lease provisions even if the tenant's legal name remains unchanged.

This can become a major issue during a business sale.

Imagine negotiating a valuable acquisition only to discover that a landlord has approval rights concerning the transfer or can impose significant conditions.

Exit planning should include lease review.

Be Extremely Careful With Personal Guarantees

A new or closely held company may be asked to provide a personal guarantee from its owner.

The business owner should understand what this means.

The company may be the tenant, but the guarantee can make the owner personally responsible for specified lease obligations.

That can materially reduce the practical benefit of operating through a limited-liability entity with respect to the guaranteed debt.

If the landlord insists on a guarantee, consider negotiating it.

Can it be capped at twelve months of rent?

Can it expire after three years of successful performance?

Can the guaranteed amount decline over time?

Does it terminate if the lease is assigned to an approved replacement tenant?

Does it continue through renewal terms?

Do not treat the guarantee as an administrative signature.

Review the Use Clause

A use provision establishes what the tenant is permitted to do in the premises.

The language should be broad enough to accommodate the business's foreseeable growth.

A company leasing space for a specific service today may add related products or services two years later.

An unnecessarily narrow clause can make ordinary expansion a technical lease violation.

The tenant should also confirm that intended operations comply with zoning, licensing, occupancy, and other applicable requirements.

Consider Exclusivity Where Competition Matters

Retail and service businesses may care greatly about who operates nearby.

A coffee shop may not want the landlord to lease the adjacent unit to another coffee shop.

A specialty medical practice may have similar concerns about a competing provider.

Where location-specific competition materially affects the deal, exclusivity provisions may be worth negotiating.

The wording matters.

The category should be sufficiently clear to determine whether another tenant violates the restriction.

Negotiate Renewal Options Carefully

A renewal option can become tremendously valuable after a business spends years developing a location.

But the details matter.

How much notice is required?

Six months?

Nine months?

One year?

How will renewal rent be determined?

Fixed increase?

Percentage increase?

Fair market value?

What happens if the parties disagree about market rent?

Can the tenant exercise the option if a minor default exists?

Businesses should calendar option deadlines years in advance.

Missing a notice date can eliminate a valuable contractual right.

Understand Default and Cure Provisions

Most tenants never expect to default when signing a lease.

Default language is still crucial.

How many days are allowed after missed rent?

Is notice required?

How are nonmonetary defaults treated?

Does the tenant receive time to cure?

What happens if a problem cannot reasonably be cured within the stated period but the tenant begins corrective action promptly?

Can the landlord accelerate future rent?

Can it recover attorney's fees?

What rights does the tenant retain after default?

These provisions can determine whether a temporary business problem becomes catastrophic.

Look at Casualty and Business Interruption

What happens if a fire, storm, water event, or other casualty makes the premises unusable?

Does rent abate?

For how long?

Who repairs the building?

Can the tenant terminate if restoration takes six months?

What happens if the damage occurs near the end of the lease term?

Commercial insurance should also be coordinated with the lease.

Property coverage, general liability, business interruption, and other policies may play different roles.

The lease and insurance program should make sense together.

Examine Improvements and Buildout

Many commercial tenants invest significant money improving leased premises.

Who owns those improvements?

Who pays initially?

Is there a tenant-improvement allowance?

What approvals are necessary?

Must improvements be removed when the lease ends?

A tenant may spend $200,000 building out specialized space only to discover that the lease requires substantial restoration costs at termination.

Those obligations should be understood before construction begins.

Think About Signs, Parking, and Access

For some businesses, seemingly minor provisions determine whether the location works.

Is signage permitted?

Who approves it?

How many parking spaces are available?

Are spaces reserved?

Can the landlord change access points?

What are the building's operating hours?

Can customers access the premises evenings or weekends?

Can deliveries occur when the company needs them?

The lease should correspond with how the business actually operates.

Negotiate the Lease for the Business You May Become

The best commercial lease does not simply work on opening day.

It provides enough stability and flexibility to accommodate foreseeable business change.

A rapidly growing technology company may prioritize assignment and expansion rights.

A medical practice investing heavily in improvements may value long-term stability and renewal options.

A restaurant may care intensely about use, signage, parking, exclusivity, and operating restrictions.

A retail business may depend upon foot traffic and neighboring tenants.

There is no universally perfect commercial lease.

There is only a lease that appropriately fits—or fails to fit—the business signing it.

At Elkhalil Law, P.C., we assist Georgia businesses with commercial lease review and negotiation, assignments, subleases, business transactions, landlord-tenant disputes, and the legal issues that arise when commercial real estate and business operations intersect.

The rent is important.

But in a long-term commercial lease, the provisions surrounding the rent may ultimately cost far more.