5 things a small business tenant must understand about commercial lease

This guide contains only general information.
It is NOT LEGAL ADVICE. It is NOT a complete guide. It contains only a general summary, which may not apply to every situation.
Please note that each state may have different standards.
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If your business relies on physical space and location, having good lease terms conveys value to your business and its prospects. Before signing the lease, it is important to understand its terms, their priority, and implications.
Who is the tenant? - Choice of entity
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.
Am I personally liable under the lease?
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.
Can I transfer my lease to the next business owner?
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.
Can I sublease the property?
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.
Do I need to pay if others sue the Landlord because of my business?
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.
How to minimize potential damages?
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.
Base rent and increases.
"Base rent" is a part of what the tenant must pay to the landlord. It is usually paid monthly and may increase according to a schedule. Base rent is not the only thing the tenant may have to pay under the lease. What is important is to understand how the rent will increase and factor it into the operational expenses.

After the expiration of the lease term, the tenant may become a "holdover tenant," which means that the landlord may increase the rent. It is important to watch out for the expiration date and start negotiating a new lease or extension ahead of time.
What is NNN ("Triple N")?
Triple "N" refers to three net costs: taxes, insurance, and common area maintenance. A commercial lease may include the tenant's obligation to pay those costs, usually on a pro-rata basis based on the square footage. The NNN charges are typically estimated at the beginning of the year and escrowed monthly with the rent, and then reconciled at the end of the year.

The taxes may include real property taxes, rent taxes (if applicable), or any other local taxes. The insurance may include the pro-rata share of the landlord's casualty and liability insurance. Common area maintenance may include snow removal, landscaping, trash, parking area maintenance, common area utilities, and other things.

Things to consider are the right to audit and dispute NNN charges, a potential cap on the NNN amount, things included in the taxes, things included in the common area maintenance, the calculation of your pro-rata share, and other factors affecting the NNN charges.

What is not included in the rent?
Certain things are not included in the rent, so, the business must secure them separately and include them in the operating budget. For example, a tenant typically must obtain liability insurance for the business, required licenses and permits, janitorial services outside of the common area, trash and snow removal outside of the common area, and utilities outside of the common area.

In considering what your business needs in terms of insurance coverage, the owner must take into account the nature of the business, the industry, potential exposure and risks, and resources.

For the utilities and other additional services, it is not a bad idea to investigate the history of utility bills and check if there are any unpaid overdue bills from the previous tenant. If your business requires a larger volume of certain utilities, you need to check whether the utility/ service company charges extra fees.
Other expenses
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.
Can I conduct my business at this location to the full extent?
It is important that your prospective landlord understands the nature of your business and warrants that there are no restrictions on doing such business at this location. The landlord may be restricted by agreements with other tenants, agreements with third parties, or even its own preferences as to what businesses to allow on the property. The "usage" provision of the lease must accurately describe the nature of the business, as well as any anticipated changes to it. For example, a restaurant business that anticipates selling alcohol or providing delivery services should include those details in the lease. The broader the description of the business, the more freedom the tenant will have in operating its business.
What if the neighbor-tenant is my competitor?
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.
What if I want the neighbor tenant to always be there?
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.
Other considerations - visibility, signage, parking lots, drive-throughs, roof, air conditioning systems, available utilities, and more.
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.
Financing - what if I can't afford the lease?
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.
What if I can't continue my business because of zoning or permits?
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.
What if I can't operate my business due to casualties?
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.
What if my contractor does not finish the project on time?
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.
Other contingencies.
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.
Commercial leases usually have a term that extends to several years or even decades. The base rent usually increases according to a schedule. At the end of the term, the lease may either terminate automatically or have an option to extend.
If your business does well and wants to stay in the same place, you may want to consider including an option to extend. Some leases have an automatic extension. Whether it is an option to extend or an automatic extension, it is important to calendar the date and put a reminder for yourself. A lease that is not properly extended may give the landlord an option to increase the rent and/or terminate the lease sooner than you expected.

A lease close to expiration may hinder the owner's ability to sell the business because the prospective buyer may want to have a locked-in rent and a considerable remaining term.
Termination by agreement
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.
New lease
If all terms and extensions have expired, the parties can renegotiate a new lease.
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