Navigating Commercial Leases in 2021 and Beyond
By Nouvelle L Gonzalo, Esq. and Brittany George
Did you know you can buy an acre of land on the moon for under $30? According to the Lunar Registry, it’s true!
Well, even if lunar land is cheap, it is likely that your commercial lease is not. As a U.S. and international corporate law firm, we regularly receive requests to review the commercial leases of our clients. As such, we want to provide you the key information before you sign your commercial lease. It is often a significant investment for companies.
What to Look For in Your Commercial Lease?
There are quite a few areas that you should review in your commercial lease. However, here are a few to begin.
1. Use Business Name as Lessee.
When possible, use only your business name on the lease. Many landlords will often require you to attach a personal guaranty in your personal name, yet if possible, ask that liability to be limited to your company. If you have been in business for five years or more, with a strong credit score, and strong financials that show your ability to pay, then you have a strong argument to limit your liability to only the business. In short, commercial leases identify the landlord, the tenant, and the property. Ensure that the names and property address are correct, and when possible, make sure that the name listed on the lease as the tenant is your business entity’s name. This will help protect you against personal liability.
2. Be Clear on Late Payment Penalties.
Look out for any penalties associated with not paying rent on time. While some landlords give grace periods for paying rent, remember that you are still legally obligated to pay that rent at some point and the missed payments will continue to accumulate. Even if your landlord does not provide a grace period, there are default, breach, cure, and remedy terms that can protect you from losing your tenancy due to a default on payments.
3. Understand Who Pays Utilities and If Your Lease is a Triple Net Lease.
You may have heard the concept before, yet a triple net lease (triple-Net or NNN) is a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property including real estate taxes, building insurance, and maintenance. These payments are in
addition to the fees for rent and utilities, and all payments are typically the responsibility of the tenant/lessee. If you do not have a triple, double, or single net lease, then all these items are paid by the landlord. Be sure you understand who is responsible. Lastly, be sure to confirm also that your percentage of the payment for utilities represents your pro-rata share of the building square footage and does not include the space of another tenant who may share a meter with you.
When Is a Commercial Lease Not a Good Idea?
Commercial leases are a significant commitment to make. Our team is often asked, what should one avoid in a commercial lease?
1. When You Do Not Have Enough Time.
A commercial lease is not a good idea when you do not have enough time to commence the lease. Often, there are several items to complete before moving in, such as obtaining business permits, conducting a professional inspection of the space, negotiation of terms, construction work, and others. Conventional lead time to complete a deal is approximately 6–12 months for less than 10,000 square feet and 9–18 months for larger deals. If your plan is to extend your business and you require this lease space to do so. Be sure that you build in enough lead time to do so. You do not want to start a lease too quickly, be in the midst of construction, pay rent for two or three months while you are still in the midst of renovations, and not be able to open your doors. Take your time and be comfortable with your selection.
2. If the Space Does Not Fit Your Needs
You have found the perfect location because of the great traffic or the right socioeconomic background, yet is your business zoned for that area? Will the space fit your needs or require a retrofit? If you are a restaurant and the space was previously an office building, have you calculated the cost to retrofit a restaurant into an office space? Location is great, yet be sure to consider all of the options. Similarly, make sure you have adequately planned out what you need out of your space. The way you want to do business should drive the location and design of your business; it should not be the other way around. This can create issues in the future by needing to relocate if you outgrow your business too quickly or just simply not being able to execute your vision.
3. When You Do Not Have Representation.
Whether you want to keep the budget down or your time is tight, you may be tempted to skip legal counsel and sign for lease. Make sure that you are being represented in your negotiations. You want to fully understand the terms and language of your lease and ensure that you are getting a fair deal, so engage a knowledgeable corporate attorney or commercial real estate attorneys when negotiating your lease. This attorney should not only review the proposed lease but also do due diligence by engaging a title company to produce a report on the building’s legal status and confirming that the zoning of the building will permit you to operate as you intend to. This attorney should review crucial lease provisions with you such as the term, rent structure, and other key items to make sure that you have a full and complete understanding of your lease.
If you need additional space in the future, want to extend your lease at the end of the term, or do something else, your attorney can work with you regarding these goals to make sure they are incorporated into the lease. You also may have more negotiation leverage than you think. Sometimes, a landlord may be desperately in need of a tenant and is willing to give more concessions, such as periods of discounted or even free rent. Your attorney can advocate for this and help you get a better deal.
If you do not have enough lead time, did not plan your space ahead of time, or do not have fair representation, we do not recommend that your proceed with your lease if you have additional options.
In addition to the areas noted above, see these key clauses noted below. These can help you stay aware of important considerations.
a. Use Clause– A use clause defines how a tenant will be allowed to use the leased space. It is critical to make sure your proposed use falls within the terms established by any use clause and doesn’t restrict your operations or particular needs.
b. Term Clause– A term clause in your agreement defines the length of your lease and
specifies the commencement date, expiration date, and sometimes any renewal options as well. Before signing, it’s in your best interest to take a realistic look down the road to determine the viability of the space in the future relative to your expected growth.
c. Rent Clause– While it might seem fairly obvious from a distance, a rent clause can include additional factors other than simply the amount of rent you will be paying. Consider what other fees will be considered a part of your rent.
d. Force Majeure Clause– A force majeure clause in a lease is a contractual provision negotiated by landlord and tenant that outlines the duties of the parties after an uncontrolled event occurs, which renders the performance of an obligation excusable by the enforcing party. This is especially important in a post-COVID world, where we see how quickly events can change life as we know it and stop contracts.
e. Assignment Clause, Release Upon Assignment, and Termination — An assignment clause includes your rights and abilities to assign the lease to a buyer of the business, and the release upon assignment makes sure that you as both tenant and guarantor will be released from the obligations of the lease if you sell the business and assign the lease to the new buyer. Also, confirm if your lease provides for a termination for cause clause that would allow you to exit your lease if certain events occur.
f. Personal Guarantee– A personal guarantee may mean that your personal assets may be seized in the event the business is not making the revenue to pay the lease, so if it must be included, make sure it is for a limited amount of time.
g. Exclusive Use Clause– This clause can ensure that you are the only business in the building or complex that offers the products/services that you offer, giving your company a huge competitive advantage.
h. Default and Remedy Clause — A default clause can ensure that you are provided enough written notice of a default and that you are able to cure the default. There may also be a period for monetary versus non-monetary default. With that, a remedy clause can protect you from the landlord forcibly taking your personal property if you do default on payment and clearly outline the rights that you and the landlord have for resolving the situation.
Termination and How to Exit Your Lease
There are a few different ways to exit your lease, but first, you must check what provisions already exist within the lease.
1. Termination Clause
Understand that there will likely be penalties associated with this unless there is an early termination clause in the lease. An early termination clause states in clear terms, how your lease is terminated. If you do not have one, you will almost always face some form of liability. In addition to paying any outstanding rent, you also may have to pay a portion of the rent due for the remainder of the lease, if not all the remaining rent due. You must provide advance written notice to your landlord of your intentions as it concerns the termination of your lease. It is also a good idea to talk with your landlord to try to work out any fees or costs associated.
2. Break Clause
There are also other ways to exit your lease. There may be a break clause that gives a tenant or a landlord the option to terminate a lease at least once during the term. This clause may be invoked by a party only when the conditions of the break clause are satisfied. You also may be able to transfer your interest in a leased property to another party before the original lease expires, but an assignment must be written into the lease. A tenant can also ask the landlord to sublease the property to another business for the rest of its lease. This also can be a clause negotiated into the lease. If it isn’t already included, a tenant may still ask the landlord to consent to a sublease. However, an assignment is the better option because the new tenant takes 100% of your obligations. In addition, know that it is common for a lease to contain a term that stipulates that the landlord has the right to approve of any possible new tenants under an assignment or sublease.
3. Co-Tenancy Clause
If there is a co-tenancy clause, this clause allows the tenant to leave if an important anchor tenant leaves; perhaps a huge superstore draws major traffic to the property. You may also have a bailout clause, which lets a tenant be released from the lease if its sales don’t reach a predetermined level. Finally, the parties are always free to renegotiate the terms of the lease at any point during the lease, so if you are able to wait a little longer, you may be able to shorten the length of your lease.
In conclusion, commercial leases are serious legal obligations that must be reviewed carefully before implementation and when trying to negotiate. Contact us for any questions you may have on your commercial lease at email@example.com or www.gonzalolaw.com.
Nouvelle Gonzalo is a U.S. and international corporate lawyer who works with companies across the globe. She is the managing attorney of Gonzalo Law LLC, a U.S. and international corporate law firm with offices in Florida and Ohio. In addition to the active practice of law, she has served as adjunct faculty at the University of Florida Levin College of Law where she has taught international corporate law for several years. She was recognized as a rising star by the national organization, Super Lawyers, in 2019 and 2020. Her practice areas include: international corporate law, intellectual property law, and nonprofit law.
Brittany George is an undergraduate student at the University of Florida pursuing a bachelor’s degree in Business Administration with a pre-law specialization. She is also currently in the combined degree program to simultaneously obtain her Masters of International Business. She has been with Gonzalo Law since May 2019 and focuses on legal research, drafting, and editing.