If you are a new business owner who is taking the important step of leasing your first commercial space, you should be aware that commercial leases are subject to some unique considerations that would not necessarily apply to residential leases, such as an apartment lease. In many jurisdictions, commercial tenants are not guaranteed the same rights as residential tenants. In the commercial leasing environment, both tenant and landlord are persons or entities engaged in business pursuits; as such, a commercial lease is generally viewed as an equal bargaining transaction between the two business interests. For example, in New York, the respective rights and duties of the landlord and tenant are almost entirely defined by the terms of the lease itself, with very little statutory or regulatory protection for the parties. In plainer terms, the courts will not be sympathetic to issues arising out of your failure to thoroughly read and understand the terms of your commercial lease. For this reason, it is crucial to have an attorney experienced with commercial leasing in NYC review your lease prior to you signing it.
While this list is by no means all-inclusive, here are some important things to consider when negotiating a commercial lease:
RENT PROVISION IN A COMMERCIAL LEASE
This is not as straightforward as a rent clause in a residential lease. In addition to monthly rent your landlord may ask you to pay real estate taxes and maintenance costs. Make sure you understand if operational costs such as electricity, trash removal, water, property taxes, etc. will be handled by you or by the landlord. Almost every office and retail lease provides for some form of escalation of the rent. Most of the time rent increases by a certain percentage each year. Sometimes rent escalations are tied to Consumer Price Index (CPI).
WHO IS RESPONSIBLE FOR IMPROVEMENTS, ALTERATIONS, AND REPAIRS?
In residential leases, the landlord is usually responsible for all repairs and maintenance of the property. However, commercial properties are commonly rented “as is”. Unless specifically stated in the commercial lease, the landlord does not have an obligation to maintain or repair your premises, or to maintain the common areas. It is paramount that you understand your obligations and have a financial plan for dealing with potential emergency maintenance that you may be held responsible for.
CAN I SUBLEASE MY COMMERCIAL SPACE?
Unforeseen circumstances can pop up for the best of us. If you no longer need the entire commercial space for yourself, will you be able to sublet all or a portion of it? The right to sublease is governed by your commercial lease. Make a note of whether or not subleasing is permitted. Even if it is, most commercial leases require you to get your landlord’s consent prior to subleasing the space. It is not uncommon for landlords in New York to charge tenants for such consent or to request a portion of the rent that you will receive from your tenant. Therefore, it is very important to carefully review the portion of your commercial lease agreement that deals with your rights to sublease the rented space and to discuss the process and all the fees with your landlord prior to signing the commercial lease.
DO I HAVE AN OPTION TO RENEW MY COMMERCIAL LEASE?
It’s always good to plan ahead. Let’s say that you signed a five-year commercial lease and your business is booming at the end of this term. Many businesses depend on their location and moving may result in your business loosing clients. Would you really want to be forced to pack up and move to a new location, possibly disturbing business and confusing your clients? A good commercial lease attorney will always advise you to negotiate an option to renew the lease.
BREACH OF CONTRACT
What will happen if one party doesn’t comply with the terms of the commercial lease? Is there a procedure or timeframe for written demands before litigation? What about mediation or arbitration? If it does come down to litigation, who is responsible for attorney’s fees, etc.? Make sure that the terms are clear and fair before signing.
WILL THIS COMMERCIAL LEASE WORK FOR ME?
You may have found a perfect space, but will the lease work for you? Many commercial leases have restrictions and it’s important to consult with a real estate attorney to make sure that you will be able to run your business without breaking any of those restrictions. Will you have 24/7 access to the space? Can you place a sign? Can you renovate the space? Will your use comply with the certificate of occupancy? Are there any noise restrictions? Typically, commercial leases contain provisions that state you can’t disturb or interfere with the business operations of other tenants. For most tenants this is not an issue. But for some, such as, pre-K, recording studios and large health care facilities, such provisions can be deal breakers.
Signing a commercial lease is a big step and one that you may have to live with for years or even a decade. It is a good idea to consult with an experienced real estate attorney before signing anything. Your attorney will have your best interests in mind and will often be able to work with the landlord or the landlord’s attorney to come up with terms more favorable to you and your business.
Written by Petro Zinkovetsky, Esq