You have finally found an adequate new office or shop space for your business, at a rent you can almost tolerate. As promised, the landlord sends over a lease for you to sign and send back as soon as possible so that you can move in right away. Not so fast. As you sit down to review that lease, there are a number of things you should look for carefully before you take on what will undoubtedly be one of your largest financial liabilities. Here are ten of them:
1. Is the “Tenant” identified correctly?
The landlord may assume that because all discussions to date have been with you, you personally will be the tenant on the lease. That may be true, but it may also be that the separate legal entity you have set up to operate your business should be the tenant. Even if you have not set up such an entity, it may be time; many businesses are formed as legal entities because of the liability the tenant assumes under a lease. You should consider consulting an attorney on this issue as it may impact a variety of other business operation issues.
2. Is the lease document complete?
Make sure the copy of the lease you received was not attacked by a hungry photocopier – check the page numbers. Make sure all of the exhibits are properly labeled and attached at the end of the document. These might consist of a site plan of the building or shopping center, a list of use exclusives or restrictions, sign criteria or tenant rules and regulations. Far too often the version of the lease the landlord sends has only “filler” pages with notations like “to be provided,” or is missing the pages altogether. You should not sign a lease that has incomplete or missing pages. After the lease is signed, make sure your copy has original signatures on it.
3. Is it clear what exactly you are leasing?
The lease may identify the premises only by street address or suite number. Is it clear what that includes? Is the size (typically in square feet) indicated correctly? If you have any doubt, do not be shy about insisting on seeing architectural plans and/or taking a tape measure into the space to take your own measurements. Make sure you and the landlord are using the same measurement guidelines – there are a few to choose from. Does the lease include designated or shared parking spaces, and at no additional charge? Is there kitchen access or storage space available if none is included in the premises. Does the space include a private restroom, and if not, what are the terms of common restroom access and maintenance – is there a key or access code? Do the restrooms, either inside your premises or down the hall, comply with the applicable requirements of the Americans with Disabilities Act? Sometimes landlords will provide a separate tenant handbook that covers operational issues like parking and after-hours access. Make sure you ask about it, and take a good look at that handbook before you decide to sign the lease.
4. Is the lease clear regarding the condition of the premises at the beginning and end of the term?
Many leases provide that at the end of the lease term, the tenant is obligated to return the premises in the same condition as when received, ordinary wear and tear accepted. It may seem easy enough to patch and paint holes in the wall or to replace a broken door handle, but what happens if the floor covering is completely worn out or the heating and/or air conditioning system no longer works? The lease should be clear which party would be responsible for upkeep of these types of repairs or replacements. It is often a good idea to take lots of pictures as soon as you get possession of the premises. Those pictures should be dated and labeled very carefully.
5. Is it clear what you will be paying?
Monthly rent payments are typically understood. Realtors will often describe spaces in terms of “rent per square foot.” It is not always clear what other payments the tenant will be obligated to make under the lease, or when. Typical additional expenses include common area maintenance costs, property taxes and fire insurance, and these are often billed less frequently than monthly; sometimes they are billed only annually. It is important for a tenant to know not only what all of these costs are, but what they are likely to be, based on recent past history. It may also be possible for you to get the landlord to agree to set limits or caps on your reimbursement obligations, or to agree you will be obligated only for your share of the increases (over the base year amounts) of certain costs.
6. When will your occupancy period and rent periods begin and end?
Be careful to date the lease carefully. That date can trigger a number of things, like when the fixed lease term begins, or the beginning of a 30-day free rent period, or the date you can take occupancy. If you know it will take some time before the space will be ready (and you can get moved in and ready to open for business), make sure the lease is clear that the term does not begin until then, or at least until a certain number of days following the signing date. If the lease term starts on the 15th, does that mean it will end on the 15th? It is common for leases to end on the last day of a month, regardless when they started. You want to be sure you know this end date so that if you are moving, you do not get stuck having to pay rent on two spaces for a week or two. Watch out for automatic renewal periods at the end of the lease term. Some leases provide that they are automatically extended (for another year, or even for another period as long as the original lease term) unless the tenant terminates the lease in writing and only within the time period required by the lease.
7. Where are rent payments supposed to go, and when?
The lease should include the address where rent and all other payments under the lease are to be sent, and when they are due. It should also be clear what “due” means – the date mailed by the tenant, or the date received by the landlord. If you are mailing your rent checks on time, but they are going to the wrong address, the landlord may consider them to be late, possibly resulting in late payment fees and default notices. Rent is typically due on the first of the month. It is advisable to build in a short grace period, such as five days, to allow for delays in the mail and/or long holiday weekends at the beginning of the month. If rent checks have to travel great distances, and/or the landlord uses a Post Office box, it may be advisable to provide that rent checks are considered “received” no more than two business days after the postmark date.
8. What are you going to be responsible for maintaining?
It is always a good idea for you or your trusted representative to do a thorough walk-thru of the premises before signing the lease so that you can see all of the features and discuss with the landlord who will be responsible for maintaining certain items. Particular attention should be paid to the roof, the heating, ventilating and air conditioning (“HVAC”) system, plate glass and the exterior of the building. It may be a good idea to have some or all of these items inspected by a professional before you take on any maintenance obligations. You need to be very careful about not getting stuck having to replace a worn-out HVAC system, especially if it dies at the end of the lease term when you would get little or no benefit from a newly installed system. You should also discuss with your insurance agent which of these items would be covered under your insurance policy (and what the applicable deductible would be).
9. Are you going to be properly insured?
As soon as you get the lease, copy the entire insurance section and send it to your insurance agent. Many leases have “standard” tenant insurance provisions that are completely unreasonable and overreaching. Landlords may not know any better either, preferring to rely on standard provisions without paying attention to whether they are outdated or practical for the particular circumstance, or the tenant fully complies with the requirements. Watch out for provisions giving the landlord the right to purchase insurance for you if you fail to comply with the lease requirements. The landlord will not have the same incentive to get you the best deal.
10. What will it cost if you remain (holdover) in the premises after the lease term ends?
There is a fair chance your lease term will end before you are ready to move. In some cases, you and your landlord may be comfortable agreeing to extend the term for another year or two at a small rent increase. But if not, watch out. Some leases include significant automatic rent increases, as high as 50% and even 100% beginning the first day after your lease ends but you have not moved out. This could give the landlord a lot of leverage in negotiating a term extension or new lease with you if you have no place else to go. A better solution would be a more modest increase: 10% to 15% is often fair because it is likely above inflation and creates some incentive for you to decide to extend the lease or move, without making it impossible for you to continue to pay rent during this transition period.
You may be concerned that asking questions like these might scare the landlord away, especially when the space may be in high demand. On the contrary, if you and your new landlord have a basic understanding of these key issues from the beginning of your lease term, you will reduce and possibly eliminate disputes and promote a much better relationship between the parties. This should enable you to spend more of your valuable time focusing on the operation and success of your business.