Avoid These Common Mistakes When Signing A Commercial Lease Agreement
When it comes to commercial lease agreements, 90% of entrepreneurs don’t call a lawyer until it’s too late. Instead of hiring an attorney at the beginning of the leasing process to help them understand and negotiate the agreement, they try to save a few bucks by handling things on their own. Most of the time, things turn out just fine. But when they don’t, the consequences are often catastrophic.
My recommendation is that every business owner have their commercial lease agreement reviewed by a small business attorney before signing it. But since I know not everyone will heed my advice, I wrote this blog piece to help you avoid the mistakes that most commonly get entrepreneurs into trouble. Check it out.
What Most New Entrepreneurs Fail to Understand About Commercial Lease Agreements
Many new entrepreneurs assume that renting a space for their business is the same as renting a home or an apartment. It’s not. Commercial leases are much different from residential leases.
Residential tenants enjoy legal protections that commercial tenants do not. For example, the law doesn’t give commercial tenants the right to withhold rents the way residential tenants can. Commercial tenants can also be locked out and have their personal property confiscated to pay for unpaid rent. Also, commercial tenants are often responsible for their own repairs.
Commercial leases are also much more one-sided than residential leases. Landlords understand that the law won’t step in to protect commercial tenants. So they include terms in their lease agreements that you would never see in a residential lease. For example, most commercial leases are triple net leases, which means the tenant is responsible for paying every expense related to the property throughout the duration of the lease.
With this is mind, it’s critical that you read and fully understand your lease agreement before signing it.
I get that leases are long, boring, and dense documents. But as a commercial tenant, any legal rights that you have will come from your lease agreement. Essentially, your lease is the law. So you have to pay attention to what it contains. Otherwise, you could be walking into a perilous situation.
Always, Always Negotiate
Your first time opening a storefront, you’re just happy to have the opportunity to realize a dream that may have been a lifetime in the making. You’re envisioning what your new place will look like, and imagining all the customers and clients coming in and out. You’re probably not thinking about the number of years on your lease, or what repairs the landlord is required to make before you move in.
… But you should be.
Commercial lease agreements are heavily skewed in favor of the landlord. And sometimes, they include terms that are downright unfair. You should always negotiate with your future landlord to better position yourself for success. Some of the key terms to negotiate include:
- The length of the lease agreement
- Renewal options
- Early termination
- Remedies in case of default/breach
- Cure periods
Don’t be afraid to drive a hard bargain. Commercial landlords are savvy businesspeople. They expect you to negotiate before you sign the lease. So develop a negotiation strategy. Write down the changes that you need, the changes that you want, and the changes that it would be nice to have in your commercial lease agreement. Then go back and forth until you’re able to work out a deal that suits you goals.
Check the Zoning
Zoning is an important factor in commercial leasing that often gets overlooked. Local zoning ordinances determine what types of commercial activities can take place in a neighborhood. It’s important to check how a building is zoned before signing your lease agreement to ensure that you can use the building for your intended purpose.
Coming out of the pandemic, I saw a lot of new business owners make the mistake of signing a lease agreement without checking the building’s zoning. It wasn’t until they attempted to get a permit from the city that they learned their plans for the space were illegal. Since they were locked into a lease, they had to develop an alternative business plan or beg the landlord for a release.
Avoid their fate by checking into the building’s zoning to ensure that your planned use of the space is permissible. Most cities have online maps where you can search the address from home. If you’re leasing a space in Philadelphia, you can check the zoning using Atlas. If your city or town does not have an online map, visit the local records office to learn more.
Do a Walkthrough
Never assume that the space you plan to lease is move-in ready. Be sure to conduct a walkthrough of the space before signing your lease agreement. This will allow you to assess the overall condition of the space before you move in, and identify whether repairs need to be made.
If the building is not in move-in ready condition, you’ve got two options. You can walk away and find another building that’s ready today. Or, you can negotiate a better deal with the landlord based on the condition of the property. Most of the time, the landlord will be willing to make the necessary repairs to get the space up to your standards.
Typically, an initial walkthrough would take place after negotiations have begun and before the lease agreement is signed. After signing the lease agreement, it may be a good idea to conduct a second walkthrough once the landlord has made the agreed-upon repairs.
Make Sure the Lease States Your Intended Use for the Property
Generally speaking, your lease agreement should state how you intend to use the property. This may seem like a relatively insignificant detail. However, it plays a critical role in the legal interpretation of your lease by adding important context to the agreement.
For example, let’s say you’re opening a butcher’s shop. And in your lease agreement, the landlord represents and warrants that the space is suitable for that purpose. However, when you move in, you find that the electricity is unstable due to faulty wiring throughout the building. As a result, the power often cuts off without warning, causing the meat you have stored on site to go bad. In this situation, the fact that the landlord is aware of your intended use may entitle you to a legal remedy that otherwise might not have existed.
Make Sure You Understand What’s Included in Your “Rent”
In commercial leases, the word rent takes on an expanded meaning. Most lease agreements are triple net leases, which means the tenant is responsible for all expenses related to the space. Utilities, real estate taxes, maintenance fees, and insurance are all considered part of the tenant’s rent. If a tenant fails to make any of these payments, they are in breach of their rent obligation under the lease and may be subject to legal action.
When you conduct your financial analysis to determine what you’ll need to make to turn a profit, keep in mind that your rent includes these extra items and plan accordingly.
Avoid Signing a Confession of Judgment
As I mentioned above, commercial lease agreements contain harsher terms than residential leases. And none is harsher than the confession of judgment – a clause so harsh that many states won’t enforce it.
Essentially, a confession of judgment waives the tenant’s right to due process in the event of a default. So if the tenant misses a rent payment or otherwise breaches the agreement, the landlord can go straight to the court and receive a judgment for possession of the property and/or damages. And the tenant will have no opportunity to defend themselves against the landlord’s claims.
A confession of judgment puts you, as a tenant, in a tough position. Of course, everyone expects to pay their rent on time and meet their other obligations under the lease agreement. But you’ll want to have the right to your day in court, if things come to that. So, commercial tenants should remove any confession of judgment from their lease agreement.
Have an Attorney Review Your Lease
Many business owners wait until things go wrong to call a lawyer for help with their lease. But once you’ve signed your lease agreement, there’s not much a lawyer can do to help you. At that point, you probably won’t be able to get out of your lease without paying a heavy price.
While hiring an attorney may sound expensive, it is a worthwhile investment to avoid the worst-case scenario. So it’s best to reach out to an attorney prior to signing your commercial lease agreement. As they say, an ounce of prevention is worth a pound of cure.
At MZA Legal, we help small business owners find clarity and peace of mind before signing their lease agreements, so they can move forward with confidence. Our clients are busy entrepreneurs who enjoy the ease and convenience that comes from working with a virtual firm. If you’d like to learn more about our contract review services, check out our website. Or, if you’d like to speak with me directly, feel free to schedule a brief discovery call to learn more about our services.