Harras Bloom & Archer LLP Blog

Tuesday, July 5, 2016

What you Need to Get Out of Your Commercial Lease

By: Lynn Cosma Wenkert

Starting a new business, or is it just time to move the operation out of your garage? 

Renting your first office or retail space is an exciting and frightening venture.  You may have worked with a broker who has helped you negotiate the basic terms such as annual rent, security and a build out allowance, but there are many other terms yet to be considered.

Rent abatement. In today’s market it is common for the Landlord to allow the Tenant several month’s rent concession at the beginning of the lease term.  This gives Tenant the opportunity to complete the build out, or time to settle in if the Landlord is responsible for the build out.  This breathing room can be critical to a retail operation that needs to establish a customer base in a new location.  It may simply allow your company to recover some of its moving expenses including items like telephone and internet wiring or new furniture.

Option to renew.  Location, location, location! Customers know where to find you and a change of location could mean a loss of customers. A prime location can add value to your business, and a lease is considered a valuable asset of a retail business.  Having the option to renew the term of your lease, will help to protect the business you have been growing, as well as save you the time and expense of moving your business.

 Personal liability.  While your landlord will allow you to sign the lease in the name of your corporation, he may still insist that you personally guaranty the corporation’s obligations.  If your business is forced to close, a personal guaranty on the lease could lead you down the road to bankruptcy court.  You can offer to give your landlord a “good guy” guaranty, which basically means that as long as the corporation pays the landlord everything owed through the date of termination, in other words is a “good guy”, that the landlord will not enforce the personal guaranty.  Be sure that any personal guaranty will terminate upon an assignment of the lease to which landlord consents.  You surely don’t want to be in a situation where you are responsible for the failure of your assignee to pay rent.

Right to assign.  Business has been good. You have managed to save a bit of money and it is time to retire to a warmer climate.  You now want to sell your restaurant, and know that location has been key to your success. A prospective purchaser of your business will want to know if the lease can be assigned to them easily, or if the landlord can make excessive demands on the new Tenant.  It is good to have a provision which states that the Landlord’s consent is not required for an assignment of the lease made in connection with the sale of the business.  At a minimum the lease should provide that consent will not be unreasonably withheld, and clauses requiring the payment of processing fees, legal fees and excessive additional security upon assignment, should be deleted. It is also critical to state that any personal guaranty will terminate upon an assignment of the lease to which landlord consents.  You surely don’t want to be in a situation where you are responsible for the failure of the buyer of your business to pay rent.

Stepped up base tax year.  Most office and retail leases provide that the Tenant will be responsible for their proportionate share of increases in property taxes over the base year.  Be sure that the base tax year referenced is the current tax year and not some prior tax year, the difference could be substantial.  Also, be sure that the proportionate share allocated to the rented space bears some correlation to reality.  A miscalculation could result in significant additional tax liability.  You may also request a cap, or outside date by which the Landlord may seek to collect these tax increases from you.  There is nothing like giving your landlord notice that you intend to move only to be sent a notice detailing uncollected or miscalculated tax increases which are due before you leave.

Proper certificates of occupancy.   This topic could be the subject of an article by itself, but we will hit some of the highlights here.  Once you have determined that you are serious about renting the premises, request a copy of the certificate of occupancy from the landlord.  You should have already checked the zoning to be sure that your intended use is permitted in that location. The certificate will tell you the specific use permitted in your space.  Unless the certificate expressly permits your intended use, you should consult an attorney to determine whether a new certificate will be required.  This is important for several reasons.  First, obtaining a new certificate can be costly and time consuming, during which time the business is usually not permitted to be open for business.  Additionally, most leases place the burden for maintaining proper certificates of occupancy on the tenant.  Thus, you could find your business closed down for months because you assumed that your new office space could also be used to warehouse your products. By investigating in advance you can shift the burden of obtaining a certificate of occupancy to the landlord, or negotiate concessions substantial enough to offset the time and expense of obtaining it yourself.

CAM and utilities.  Understand what your base rent includes.  Responsibility for the payment of utilities varies widely often depending upon whether or not the Premises are separately metered.  Even if the space is not separately metered the landlord may require the tenant to contribute to the utility bill on a proportionate basis. There is no norm as to which utilities are included, so you need to be sure that responsibility is made clear.  Common Area Maintenance (“CAM”) refers to the tenant’s proportionate share of maintaining common areas of the building and its surrounds, as well as management costs.

CAM can include items such as parking lot maintenance, snow removal, elevator and stairwell maintenance, rest room maintenance, roof repairs, plumbing and heating repairs, utilities for common areas, salaries for building employees and management costs.  Be sure to review the definition of CAM charges, to know what is included, and also determine if you are responsible to pay a proportionate share of such expenses, or just a share of any increase over a base year.  Obviously the increase over base year approach will save you a significant amount of money.

Evening and weekend use.  Never assume that just because you have the key, that you can use the space whenever you wish.  This is not your man cave.  Even if you are not locked out of the building, you may find that the elevators are not working or that the HVAC is not on.  Many service businesses need to be open evenings and weekends to accommodate their customers. Be sure that you will be able to operate during the hours your business requires.

These are just some of the basic terms to consider and will hopefully start you down the right path in negotiating a lease that meets the needs of your business.  For help with your commercial lease, please contact Lynn at lwenkert@hba-law.com.




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