5 things a small business tenant must understand about commercial lease

Who is signing the lease is an important question. If a person signs it as a natural person, any default on the lease may expose his or her personal assets to liability. However, if the signor is a business entity, the owner's personal assets are better protected from liability. Click here to read more about entity choice in California and D.C.

This is a question of whether to sign a personal guarantor agreement or agree to be "jointly and severally liable".

A personal guarantor agreement means that if the tenant defaults on the rent payments or in any other way, the guarantor agrees to pay instead of the tenant. This means that the landlord may initiate a lawsuit against not only the tenant but also the guarantor.

"Joint and several liability" of tenant and guarantor means that the landlord may seek the full amount of damages from either of them.

It is not unusual for a landlord to ask for a personal guaranty from business owners and his/her spouse. If the personal guaranty can be avoided by offering a larger security deposit or other concessions, it is better to explore those options. However, if a personal guaranty is a dealbreaker for the landlord, consider suggesting limiting the personal guaranty to only exceptional cases of default. For example, it can be limited to situations when the tenant is in default for more than 12 (or more) months. This may narrow the scope of potential liability.

This is an important question if you are planning to sell or transfer your business to someone else. To transfer your business, you will also need to "assign" the lease. The landlord usually reserves the right to have the final say in whether to approve the assignment or not. The tenant may want to consider limiting the landlord's discretion in choosing who the lease can be assigned to. The broader the landlord's discretion, the harder it may be to find a buyer for your business.

The ability to sublease the property may be important for certain businesses, such as shared office space companies or self-storage companies.

If you are planning to sublease the property, you need to understand that the tenant usually remains responsible for rent even if the subtenants do not pay.

You also need to check whether the lease allows you to sublease the property, and on what terms. Typically, the landlord wants to be in control of who occupies the property, and so the sublease may be conditioned on the landlord's approval. If you want to have more freedom in who you choose as a subtenant, it is better to negotiate this in advance and potentially remove the requirement for the landlord's approval.

Landlords usually include indemnity provisions to protect themselves from any liability arising out of the tenant's business. The duty to indemnify means that the tenant will pay for the landlord's expenses if someone brings claims against the landlord. As an example, if your customer slips and falls on the parking lot and sues the landlord for injuries, the landlord will want to require you to pay for that. The language of indemnity provisions is very important. It is advisable to consult with an attorney to understand the scope of indemnity. A too-broad scope may cause unnecessary costs in cases when third parties claim the landlord's liability.

Finally, it is important to closely examine what triggers the liability under the lease. This may be found in the definition of "default." While it is hard to predict all the reasons for a "default" (not paying the rent, slow business, closure of roads, public domain, disasters, or the like), the tenant may want to narrow the definition of "default" and also consider asking for a grace period to cure a default.

Many other things may indirectly put additional expenses on the tenant. The company must either discuss shifting the burden on the landlord or accept it as its operational expense. For example, outside signage, and maintenance of exterior walls, roof, and adjacent property.

To protect your business from unnecessary competition, a tenant should consider including in the lease a restricted use clause. This clause will restrict the landlord from leasing space in the same shopping or office center to your potential competitors. For example, as a Japanese restaurant owner, you probably will not want another Japanese restaurant right next door. However, a creamery or a game store - neighbor may enhance your business.

The landlord will probably want to have more freedom in who it can lease property to and will prefer narrower restrictions. When negotiating the restricted use clause, the tenant may also consider the size, brand, products, or services of potentially unwanted neighbors. The tenant may also want to include in the lease the remedies if the landlord breaches the restricted use clause, such as reduced rent or an option to terminate the lease.

The opposite is also true. If the tenant's business depends on the neighbor-tenant (for example, restaurants and movie theaters), it is desirable to include a co-tenancy clause in the lease. This way, the tenant may condition the continuance of its lease on the tenancy of the neighbor.

If you need the building to be visible, you may want to consider asking the landlord not to build anything around the property, or have the ability to terminate the lease if this happens because of someone else's building. If a parking lot or a drive-through is important for your business, the tenant may want to spell this in the lease and include remedies for the inability to use those things. If you need certain kinds of access or utilities for your business and they later become unavailable, those things should be discussed and included in the lease as well.

If your business depends on financing, you may want to consider including a condition of obtaining the financing. Otherwise, the landlord may require the payment of rent even if you cannot start your business at the location.

If your business depends on local zoning or governmental approvals or permits, it is important to spell those approvals and permits in the lease and make them a condition of the lease. If the governmental agency does not approve certain usage of the property, the owner risks still being liable for the rent under the lease.

Fires, flooding, earthquakes, outages, and other unpredictable events may interrupt your business. The tenant should carefully examine whether it can terminate the lease if the business cannot operate due to those casualties. The landlord will likely want to have time to cure or rebuild the destroyed property, but if the tenant cannot use the property during this time, it should consider shortening the cure time as much as possible.

If the business needs to remodel the place or depends on the local authority's permission for occupancy, it is better to discuss the timing and conditions beforehand and spell them out in the lease. The company should consider including the conclusion of all construction and occupancy permits as a condition to the start of its rent obligations.

If the business depends on any other conditions (licenses, agreements with third parties, governmental approvals or new rules, international export or import restrictions, legal or illegal status of certain activities, or other things), it is better to discuss them with the landlord in advance and include them in the lease. The tenant may want to have the option of terminating the lease if certain conditions do not happen. The landlord, of course, will try to remove those conditions. The tenant should balance its priorities and negotiate the terms of contingencies accordingly.

If the owner wishes to close the business, but the remaining term under the lease has not expired, the tenant should consider approaching the landlord to ask to terminate the lease by agreement. Similarly, if the landlord does not want to continue renting the building, it can approach the tenant and ask to terminate the lease by mutual agreement.

If there is no mutual agreement to terminate the lease and absent any other grounds for early termination, the terminating party usually has to pay certain damages.

If all terms and extensions have expired, the parties can renegotiate a new lease.