Three Commercial Lease Terms A Tenant Should Be Aware Of
Generally, the terms of the lease will be in favor of the landlord.
The lease is not pages long just so you can use it to prop open your door. So, do you know what provisions are in your lease and how such provisions will impact your tenancy?
If you have incorporated your business then the tenant will be your business entity and not you individually. In this situation, the landlord will most likely request a personal guaranty. A personal guaranty is when the owners of a tenant agree to be responsible for the actions and liabilities of the tenant. The reason for such personal guaranty is that the landlord is unsure if the tenant’s business will fail and go out of business prior to the end of the lease term.
If the tenant goes out of business and defaults on the lease then in that situation the tenant is probably uncollectible (since it is out of business). So, the landlord attempts to limit its damages by requiring the owners of the tenant to personally guaranty the obligations and liabilities of the tenant.
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The lease term and renewals.
This one is pretty basic. The lease will be for a fixed term of years. It has been my experience that the landlord will want to have a longer initial lease term, say five or seven years, than the tenant. The landlord does not want a vacancy after just one year.
If your business is new or growing, are you comfortable with a five year term? Are you confident that you will be in business in five years?
Everyone intends that their business will be successful over the long term but things happen. If your business is experiencing tough times and you have to downsize or close your business and if the landlord required a personal guaranty then you may be personally responsible for any remaining payments due to the landlord. Therefore, as the tenant, you may seek to obtain a shorter initial lease term, say two or three years, with automatic renewals. The goal would be an automatic renewal without requiring landlord consent.
How much are you paying per month to the landlord? You will most likely be paying the landlord a flat fee every month. Does the lease require you to pay the landlord any additional sums per month? Do you have to reimburse the landlord for common area maintenance (CAM) expenses? Do you have to pay the landlord a percentage of your income? Is the lease a triple net lease?
In a triple net lease you will reimburse the landlord a percentage of the landlord’s expenses in operating the property —property taxes, building insurance and costs to repair and/or maintain the property. You and your budget may be in for a shock if after the first month you learn that in addition to the monthly rent that you also have to pay CAM, percentage rent, property taxes, building insurance and repairs and maintenance costs. This is why it is important to read and understand the terms of your lease.
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