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Before You Sign: Quick Tips for Understanding the Terms of a Commercial Lease

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Before You Sign: Quick Tips for Understanding the Terms of a Commercial Lease

By JamieD
Published: March 23, 2010 Updated: February 10, 2011

Small businesses often need to lease commercial space to operate - whether in a standalone brick-and-mortar store, a booth at a flea market, a floor in a commercial building, etc. Because most people feel comfortable renting residential property, they may not be aware of a few important factors to consider when leasing commercial property. Commercial leases are very different from residential leases: commercial leases aren't bound to the same consumer protection laws; they usually don't follow the same standard forms; and while they tend to offer more flexibility in negotiations, they also tend to be longer and much harder to break. Before you sign a commercial lease for your business, make sure you understand what you're getting yourself into.

When you look over the terms of your commercial lease, ask yourself these questions:

  • Does the lease clearly outline both parties of the agreement?If your business's legal name is Molly Margaret LLC, make sure it says that and not just your name to avoid personal liability.

  • Does the lease clearly outline the premise or space for your agreement? Your lease should make it very clear what property you'll be occupying. A street address is sufficient if you are renting an entire building; however, if you are renting a floor or a portion of offices, more specific information is required. In addition to your offices, do you have access to storage facilities, kitchens, parking, etc.

  • Does the lease clearly outline all start dates? The terms portion of your lease should tell you what, when, and for how long your lease is for. A 3-year lease may not be as simple as that sounds. Your lease should tell you the start date of your 3-year period, the date you are responsible for tenant requirements such as insurance, and the start date of your rent.

  • Does the lease clearly outline your required rent and all stipulations?Your rent obligations should be easy to understand. Be sure to check for other factors such as a rent increase over time, an allowance for facility improvements, or facility issues that your landlord will not include in your rent.

  • Does the lease clearly outline all security deposit requirements?A security deposit for a commercial property is often much higher than one for a residential property. Make sure you know what is required in your lease and be realistic on whether or not it's feasible for your business.

  • Does the lease clearly outline all maintenance procedures? Your lease should detail what maintenance responsibilities are yours and what are the responsibility of your landlord.

  • Does the lease clearly outline how your utilities will be paid?If you rent an entire building, the utilities should be very simple. If you rent a space with other tenants, paying utilities may be slightly more involved. Either way, your responsibilities for paying utilities and bills should be clearly outlined in your lease.

  • Does the lease include a use clause? A use clause spells out what a tenant is legally allowed to use the rented space for. A landlord may be worried about personal liability or may have personal issues with particular purposes. These would be outlined in a use clause and prohibit the tenant from operating in a particular way. For business purposes, it is generally best to avoid leasing under a strict use clause.

  • Does the lease include an exclusive clause?If your sharing space in a larger facility, an exclusive clause allows for only one tenant to operate a particular business or a sell specific product in that facility. Make sure that your business will not be negatively affected by an exclusive clause in your lease.

These are highlights of a few important factors to understand before signing a commercial lease. As always, be sure to read and understand the fine print. For the best advice on your specific lease, it's best to consult a small business expert in your area or a lawyer.

For more information check out

  • Small Business Administration's page on Commercial Leases
  • Business.gov's guide to Choosing a Business Location

About the Author:

Comments:

Great article. I think it is important to let small business owners that might not be experienced in commercial leasing how big of a commitment they are entering into. Being a bit pessimistic by nature, in cases where I am entering into a multiyear contract, I always look at the worst possible scenario. In the case of a commercial lease, this means what would happen if the business folds and I have to vacate the premises. As the article says, making sure that the lessee is the business and not the individual is very important. The small business owners does not want to be personally liable for the term of the lease. Another important item to review is the presence of an assignment and subletting clause, which should allow you to find a replacement tenant.

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