Understanding a Commercial Lease Agreement

Understanding a Commercial Lease Agreement

By E. Drew Nelson, Attorney

If you own a business or are planning to start one, at some point you will probably need to lease space for your business. While you might choose to purchase a property, most businesses begin by renting the necessary space. Most of us have rented apartments or homes and have seen boilerplate rental agreements. Various consumer protection laws govern these agreements and give lessee’s some modicum of protection. Commercial lease agreements are not governed by the same rules, so it is important to fully and completely understand any legal document you sign.

There are a number of specific things you should look for in any commercial lease agreement, among them:

  1. The lease term should be clearly spelled out. We normally recommend asking for a shorter-term (1 or 2 years) so you are not locked in if your business fails or sees exponential growth requiring more space. Monthly payments should also be spelled out, to include any deposits required, late charges, interest rates and acceptable methods of payment.
  2. Termination and renewal terms should be defined. If you choose not to renew the agreement, how much notice must you give? In what form must that notice be provided? You don’t want to be stuck with a contract that renewed automatically because you failed to send notice via certified mail 60 days in advance. Likewise, if there is not an option to renew after the initial agreed-upon term, you could have to move unexpectedly. This sometimes happens when the landlord knows the building will be sold or renovated in the near future.
  3. What changes are you permitted to make to the leased space? In most cases, you will need to reconfigure the space you lease to meet your specific business requirements. The details outlining what you are permitted to do with the space, whether or not you must use certain contractors, and what happens when you leave (are you charged for the landlord to reconfigure the space) should all be included in the lease. If your business requires extra utilities, for example you are running a server farm and need non-standard electricity options and additional HVAC run in, will you be able to do this?
  4. What maintenance is covered in your lease agreement? Is emergency 24-hour service available? If you are responsible for paying for maintenance items, these should be spelled out in detail and you should understand the potential costs.
  5. Is parking included in the agreement? In some situations, you will be charged separately based on the number of spaces you wish to lease.
  6. Are utilities included? How about cleaning?
  7. What security does the building have? Is there an additional charge, for instance, if you ask to have the locks replaced with card key readers?
  8. What are the terms for any signage you will display? The lease agreement may restrict the size or style of sign used inside or outside the building. In some cases, you must lease space on the marquis for your name to appear there. You may also need to check with the city or town where you’ll be leasing space; there may be limits on sign placement and style.
  9. Do you have the option to sublet the space should it be necessary?
  10. Is the lease agreement in the name of your business or in your name? Your choice of business structure can protect your personal assets, but if you sign a lease agreement in your own name you will be personally liable.

If you have any questions at all regarding a lease agreement and your liability in signing the document, I recommend you speak with an attorney familiar with commercial lease agreements to review the lease. This will ensure you are protected under the law.