Commercial Real Estate for Lessees — Legal & Practical Considerations
People running small businesses often find themselves in need of a commercial space in which to run their business. Business owners may feel confident enough to negotiate a commercial lease based on their experience with residential leases, but there are a few differences between commercial and residential leases.
Commercial leases are often for a longer period of time than residential leases, and there are fewer consumer protection laws that apply to commercial leases. People entering into commercial leases are assumed to have a higher degree of sophistication, meaning they are expected to be able to negotiate to protect themselves through the language in the lease rather than relying on protections in the law, like those that tenants in residential leases often receive. Both of these differences mean that a business owner should take care before entering into a commercial lease.
Due Diligence
It is important that business owners conduct due diligence before leasing commercial real estate. Due diligence essentially means conducting a thorough investigation of the property. Business owners may consider evaluating the physical condition of the property, the surrounding neighborhood and businesses, and the ways in which the property is sufficient or insufficient for its intended use. For example, a business owner may negotiate that the lessor will repair a large crack in the cement at the primary entrance of the property not only because it could become a possible tripping hazard for employees and customers, but also because it may reflect poorly on the business’ image, especially if the success of the business relies on a sense of elegance or luxuriousness.
It might also be smart to assess the surrounding neighborhood and businesses for how things like a similar business on the opposite corner will affect immediate business, and how the business and the neighborhood might grow and change in the future. It is sometimes worth hiring experts to help conduct due diligence, such as business consultants, market analysts, and others.
Potential lessees should ask about operating costs and other expenses. A lessor should be able to provide a general sense of costs like utilities and maintenance. Previous tenants and business owners in the area might also have some useful insight, although lessees should be cautious not to rely too heavily on this information. For example, a business down the street might offer advice about complying with local ordinances, not realizing that they have been grandfathered in and do not need to follow the latest version of the law.
The Length of a Commercial Lease
Commercial leases tend to be for longer periods of time than residential leases, but short-term commercial leases do exist. There are pros and cons to both. Short-term leases can be advantageous for business owners who want the flexibility to move their business when they wish. However, there is no guarantee that the lessor will renew the lease if they do want to stay. Another disadvantage is that the rate or price of the space is guaranteed only for that short length of time — long-term leases can be a better option for business owners who value locking in a specific rate. It is also possible that a lessor will be more willing to negotiate on other lease terms in the case of a long-term lease. The disadvantage of a long-term lease lies in the chance of discovering later that the property or the lease terms are not the best fit for the business.
Important Lease Terms
Before signing on the dotted line, a business owner should make sure that they understand their rights and responsibilities. One thing to consider is their ability to leave the lease early, especially since commercial leases tend to be for a period of years rather than months. They may have the option to break the lease by paying a fee, or they may be able to transfer their lease to someone else.
A business owner should also read the lease to understand things like who pays the utilities, taxes, and insurance on the property, who will be responsible for repairs and maintenance, and how future issues with the property will be addressed. If they have agreed with the lessor that they will be permitted to make certain improvements to the property, the lease should grant that permission, speak to who will pay for those improvements, and note whether the lessee can take the improvements with them when they leave.
A business owner should also be sure that they will be able to use the property as they intend. If they envision a large sign on the lawn or a sidewalk sale in summer months, the lease should authorize that. Finally, lessees may be able to negotiate a stipulation that the lessor will not rent a nearby space to a direct competitor.
