You’ve found the perfect commercial space for your growing business, a place that will serve you and your team on your path to success. But if you’re not looking for pitfalls in commercial leasing agreements, those sweet dreams can come back to haunt you.
Leasing hiccups keep business owners up at night. Your commercial lease spells out what you pay for and for how long, along with your landlord’s responsibilities to you.
Here are the most common pitfalls in commercial leasing agreements you need to be aware of — let’s dig in.
Overlooking Key Commercial Lease Terms
Every business lease contract is chock full of legalese, and you’ll need to know what these terms means to have productive negotiations.
Common terms and phrases include:
- Rent amount
- Term length
- Lessor and lessee
- Use clause
- Term clause
- Premises clause
- Escalations
- Rentable vs. Usable square feet
If you don’t understand a term, don’t gloss over it. Keep asking questions until it all makes sense.
Neglecting to Negotiate Rent Increases and Escalation Clauses
Your lease may include an escalation clause that allows landlords to automatically increase rent before the lease expires. Surprise rent increases can negatively impact your business’s cash flow and create other financial challenges.
Remember that leases are negotiable. For example, you might ask the landlord to increase the rent based on Consumer Price Index trends or a fixed amount, whichever you find more favorable.
Or, a new business might ask the landlord to hold off on any rent increases for the first few years as you build financial stability.
Not Understanding Common Area Maintenance (CAM) Fees
Common Area Maintenance (CAM) fees help to keep up shared resources, such as parking lots, lighting, or atriums. These fees can add up quickly though, so it’s important to understand where your money is going and how it’s benefiting your business.
If certain common areas don’t affect your business or you’re unable to get the full benefit of these spaces (e.g., the business next door uses most of the parking lot), you may be able to negotiate lower fees.
Not Involving a Tenant Representative or Legal Counsel
Commercial leases tend to favor landlords, with terms that can affect a tenant’s profitability. Without expert lease agreement review from a tenant representative, businesses may unknowingly agree to unfavorable clauses, such as excessive rent escalations, hidden fees, or restrictive use provisions.
Failing to Address Maintenance and Repair Responsibilities in a Commercial Lease Agreement
A commercial lease should clarify who is responsible for repairs and maintenance. The more detail, the better. This way, tenants aren’t on the hook for costly expenses that erode their profit margins.
Ideally, the lease should also stipulate how long the responsible party has to rectify a situation, especially those that directly impact business operations. For example, if there’s a roof leak, timely response will mitigate additional damage and reduce business disruptions.
Ignoring the Importance of Tenant Improvement Clauses
Most commercial spaces will need additional improvements to suit the tenant’s business. This takes time, money, and effort, and often a business can’t generate revenue until improvements are made.
You can negotiate tenant improvements and build-out costs in the lease. This might be in the form of deferred payments or credits to reduce your out-of-pocket expenses, for example.
Overcommitting to Lease Terms Without Exit or Flexibility Options
Leases can — and should — offer flexibility if your business needs change. Make sure you can terminate the lease if your business fails — or better yet, it outgrows the space sooner than you think. There may be fees involved, but paying the remainder of the lease shouldn’t be your only option.
You can also negotiate the option to sublet the space. Your landlord may have specific requirements for subleases, so make sure those terms are spelled out clearly in the lease.
Failing to Clarify Use Restrictions and Zoning Compliance
One of the most common pitfalls in commercial leasing agreements is failing to confirm that the leased property aligns with the intended business use.
Many leases include use restrictions that limit the types of activities that can be conducted on the premises. If a tenant signs a lease without reviewing these restrictions, they may be unable to operate their business as planned.
Overlooking Insurance and Liability Provisions
Failing to review insurance and liability provisions in a commercial lease can expose you to financial and legal risks. For instance, you may need to maintain certain types of insurance and minimum coverage amounts.
Some leases shift a disproportionate amount of liability onto the tenant, including incidents beyond their control. Tenants should negotiate for fair and clearly defined responsibility, especially regarding common areas, structural repairs, and third-party claims.
Avoiding Common Leasing Pitfalls for a Successful Agreement
Not understanding your lease could mean you end up paying for more than you budget for, which could affect the livelihood of your business and employees.
It’s up to you to be proactive in lease negotiations and avoid these and other pitfalls of commercial lease agreements. Contact us for guidance on your next commercial lease and secure better terms for your circumstances.
