Sunday, July 15, 2007

Understanding Commercial Leases

A commercial lease is a major expenditure for most small businesses. Frequently these types of leases are of long duration and will affect the profitability of your business for many years to come. As a business owner it is important that you read and understand every term contained in the lease, it is an enforceable contract. Many times landlords will provide prospective tenant with their “standard lease”, a pre-printed form that may not suit your needs. A “standard lease” has been prepared by the landlord’s attorney and is normally drafted in a way that favors the landlord’s interests and protects that individual’s rights.

Many times pre-printed forms are used for their psychological effect: as a mechanism to prevent the other side from thinking they can negotiate more favorable terms, don’t fall into that trap. Of course, how much you can negotiate depends on the status of the commercial real estate rental market. Regardless, you should make sure that any verbal promises made by the landlord make their way into the lease. Most leases have an “integration clause”, it states that all prior unilaterally terminate a service that may have been one of the primary reasons you selected the property. For example, you may have chosen a property because it was clean and secure. The landlord provided a cleaning service and security patrols. If the lease does not include these terms the landlord has the right to discontinue these services and there is nothing you can do about it. If these services are included in the lease agreement, the landlord has a legal duty to provide the service.

Some terms which should be contained in commercial leases include: identification of the parties (names and addresses, where rental payments should go), identification of the premises being leased, the permitted use and occupants of the premises, the term of the lease including occupancy and commencement dates (they are different), amount and disposition of any security deposits, the amount of rent and frequency of payment, a description of the building services the landlord will provide (utilities are a big expense these days!), a list of what isn’t included (taxes, maintenance & repairs, insurance, etc.), signage rights, tenant improvements, options to purchase or expand, what happens in event of default, assignments and subleases, relocation, re-entry rights, parking, fixtures and zoning.

Terms to watch out for include paying for landlord expenses in connection with a sublease (beware of attorneys’ fees!), limits on advertising and/or competing with landlord for space available for sublease, clauses obligating the tenant to cover the landlord’s expenses for the cost of managing the property. Any of these provisions can cost your business dearly.

Article complements of Dawn D. Fleming, ESQ. of Pre-paid Legal Services at 714-606-3520 or visit