You’ve got your business idea and a plan, but now it’s time to find the perfect space for your new venture. What do you do?
Entering into a lease is a significant step for any business. Unlike residential tenants, commercial tenants have fewer legal protections. The lease is a contract between two parties – Landlord and Tenant – usually with unequal bargaining power. It’s essential to properly vet the space and understand the details of your lease.
While you are searching for that perfect location, here are some important steps to remember:
- Inspect Before You Invest: Landlords often rent spaces “as is.” We highly recommend having a qualified, licensed inspector look at the space and provide advice. Major issues to watch out for include:
- The age and condition of the HVAC system
- The presence of mold or lead paint
- The condition of the plumbing and electrical systems
With this knowledge, you will be in a better position to negotiate the lease and request repairs or warranties from the Landlord.
- Check Permitting and Zoning: Another major issue is whether you will be permitted by the applicable governments to open your business in that space. Is it properly zoned for your business? Do you need any special permits or licenses, and how long will it take to obtain them? The Landlord will put the responsibility for these issues on the Tenant, so it is critical to determine this at the beginning.
- Explore your Build Out Costs. Terms such as “Cold Dark Shell,” “Vanilla Shell,” or “Spec Suites” are often used in space advertisements to describe the extent of build out required by the tenant before opening for business. Sometimes, the landlord may offer a tenant allowance to cover necessary construction, or these costs may be borne entirely to the tenant. When preparing your budget, consider asking relevant questions and requesting quotes from contractors for any anticipated work prior to signing a Letter of Intent (LOI). Having more information can assist with planning.
- Ask About other Costs besides Rent. Many leases are “triple net” meaning that in addition to base rent, the tenant will pay the common area charges (“CAM”) and the real estate taxes of the Landlord for the premises. CAM and taxes are usually limited to a proportion of the square feet of the space to the rest of the larger project (such as building, shopping center). When you are considering spaces, you can request the historical CAM and real estate taxes to understand the typical amount passed on to the tenants. You should also ask how the tenant pays these charges. Sometimes Landlord’s will wait until they receive a bill and immediately demand payment from the Tenant. Planning is very important to ensure you are not caught off guard by an unexpected invoice.
- Negotiate the LOI. Once you have settled on a space, you (or your broker) should request a LOI. The LOI is a non-binding outline of the business terms of the lease including – the amount of rent and the rent commencement date, any additional charges due, the length of the term and any renewal terms, the build out obligations by both the Tenant and Landlord and many other terms. If you have not already, the LOI is the stage to bring in your legal counsel. Frequently once the LOI is signed, the Landlord will not renegotiate the specific terms in the LOI. Items like exclusivity, limitations of personal guaranties, and contingencies for the tenant to obtain financing should all be negotiated in the LOI.
The bottom line is the more you understand what you are signing and the potential issues of the desired space, the more that you can be protected and excel in growing your business at that space.
We are happy to discuss any issues you may have with leasing, feel free to reach out.
