Spotting ‘hidden’ but dangerous terms in a commercial lease
Thursday, January 23, 2020
Signing a commercial lease agreement is a huge milestone in the life of your business. It can greatly contribute to the success or failure of your business. When signing a commercial lease agreement, it is important to pay close attention to the business as well as the legal terms of the agreement, as it is usually not easy to change or get out of a commercial lease agreement once it has been signed.
On the upside, commercial leases are not based on standard forms and can be customized to the needs of your business. Generally, a standard lease will usually lean towards suiting the landlord’s needs. However, all the terms can be negotiated and you, as the tenant, can and should negotiate these terms to suit and protect your business needs as well.
You should, therefore, speak to an experienced real estate lawyer before you sign any lease agreement. A good real estate lawyer should explain all the terms of the agreement to you in layman’s terms.
He or she can assist with negotiating and making sure that the terms of the agreement are friendly to the needs of your business. A good understanding of the terms will help you to avoid unfair clauses that could be costly to you and your business a few months or years down the line.
Below are some important terms or clauses that are often overlooked, but that can be very dangerous for your business.
Permitted use clause
A restricted use clause limits how you may use the space. Ideally, you would want to avoid severe restrictions on how you may use the commercial space. To this end, a broad use clause will be much more favorable to you than a restrictive one.
Among other things, a restrictive use clause can have an impact on the future expansion and development of your business. You need to make sure that there is no clause in the lease agreement that will limit your scope or ability to expand your business activities.
For example, if you want to sublet a portion of the property to a sub-tenant who may be important to the development of your business, will the agreement allow you to do this? Or perhaps you want to start a food canteen for your staff in the future; will you be permitted to prepare and serve food on the premises?
Ask the landlord for a copy of the building’s certificate of occupation and check that your needs will not violate the use terms of the certificate.
Another example might concern parking. Depending on your type of business, client parking might be very important to you.
Will you be able to use the property’s parking lot for your clients? Can you use the parking bays in front of your area exclusively for your clients? Will your staff have allocated parking bays? A first-come, first-serve parking scenario might not suit your needs but the lease you signed might stipulate that this is how it will be.
A relocation clause allows your landlord to relocate your business to a different area within the rental complex. Landlords often want the option of relocation in case another tenant wants to expand or they are willing to pay a higher rental fee.
A relocation clause puts you at a disadvantage because your customers might have become accustomed to meeting you at a specific address, and now, all of a sudden, you are no longer at that address. Not to mention the cost and time it will take to update all your marketing and sales materials to reflect the new address.
The best way to avoid this is to negotiate the relocation clause out of the lease agreement before signing. Alternatively, you need to negotiate terms that will protect you in this scenario.
For example, the new premises must be comparable to the original one, the landlord must cover the cost of relocation (this may include new business cards and new equipment fittings) and so on. You might want to add that you will have the right to terminate the lease if the new premises are not suitable.
This is probably one of the most overlooked clauses in commercial leases.
An option to renew at the end of the lease term can be of great value to the tenant. It gives you the choice to move or stay on the premises and avoid the cost and inconvenience of moving. However, be very careful before accepting such a clause. It can come with significant risks. A clause that merely says that the parties “agree to agree” on renewal terms at a later stage could be dangerous.
For example, you’ve been renting the premises for $18,000 per month (escalating at a fixed % per year for the initial rental term) for 5 years. Your renewal clause states that you have the right to renew and that the new rental period and rental shall be agreed on in writing between the landlord and the tenant at the time of renewal.
When you give the landlord notice that you would like to renew, he agrees to renewal but at $120,000 per month. Where does that leave you? You could argue that it is unfair and that you could fight him in court, but will it be worth the legal cost? After all, the court might say that you expressly agreed to that clause!
Avoid an “agreement to agree” clause at all costs. Your renewal clause must be drafted with great care. At the very least, the agreement should give you a basic sense of what you can potentially expect to pay in rental fees should you decide to renew.
The lease will generally require you to comply with state and federal laws. For example, the Americans With Disability Act requires all businesses that are open to the public or that employs more than 15 people to have premises that are accessible to disabled people. If this applies to your business and you signed the compliance clause, you will be responsible to make the premises compliant with the Act, and pay for any modifications such as ramps or wider doorways, if it didn’t comply before.
Make sure that the premises are indeed in compliance with all relevant laws and regulations at the commencement of the lease period, before you sign to agree to keep it in compliance with the law. Ask the landlord for a warranty that the premises are in compliance and include the warranty in your lease agreement.
The above-mentioned pitfalls are only a few of the issues that tenants must look out for when signing a commercial lease agreement. It is very important to understand all the legal implications of every clause in your agreement.
While you may not be able to understand many of the terms in such an agreement, this is exactly why it is always a good idea to speak with a lawyer to help you understand what you are getting into, before signing any lease agreement. The future and success of your business might depend on it.
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