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Updated: March 27th, 2020
Signing a commercial lease is a big step for any business. Before you sign any lease, there are few things that you should keep in mind that will save you potential headaches down the road. After all, this is where you’ll be operating your small business for at least the next few years and potentially longer.
Here are a few clauses to be mindful of:
When looking for a lease, be aware of how much it will cost to sign the lease and any extra costs that you may have not previously accounted for. Signing costs could include money for security deposits, key money, and a portion of rent upfront. Extra costs could include common area maintenance costs, property taxes, insurance, and utilities.
There are several different types of leases out there. Here’s a quick breakdown of how you can tell what type of lease you’re dealing with and how it will affect your costs:
Also, be aware of what “percentage rent” clauses are and how they might affect your business. A percentage rent clause is extra rent paid to the landlord based on a percentage of your monthly or annual gross sales. It’s usually best if you can negotiate this clause out or to a lower percentage. If the landlord is unwilling to remove the clause, a creative compromise is to have the percentage rent clause only go into effect after your business hits a certain dollar amount in gross sales.
Here’s looking to your future. You’ve spent tons of money on PR and marketing. You’re finally getting traction, but your lease is almost up and rent has skyrocketed. If you don’t want to end up in this situation, make sure you’ve locked in renewal options.
Commercial leases can range from 2 years to over 100 years. Often commercial leases run between 5 to 20 years with one or more options for renewal. A shorter term would allow for more flexibility in adjusting to the needs of your business and renewal options would allow you to renew the lease for an additional term for a set price. Be wary of any renewal options that allow the landlord to set the price at “market value.” In such a case, you would be missing out on the true benefit of locking in an amount early on.
You may find yourself outgrowing your space or falling on tough times and needing to downgrade. Favorable assignment/sublease clauses would allow you an alternative to terminating your lease and paying an expensive termination fee. Such an agreement should allow you to transfer the lease and detail the steps of how to transfer the lease, subject to the landlord’s reasonable approval.
It’s also important to be aware of default and termination clauses. You will want to negotiate how much time will be allowed to cure a default before eviction and any potential penalties for early termination if you cannot find someone to take over your lease or if your lease does not allow for assignment/subleasing.
Location will likely be one of your top considerations. Whether you’re a service provider, a retailer, or manufacturer, the location of your business will greatly impact the cost of your lease. Location will also likely dictate zoning laws that will affect the operation of your business. Before signing a lease, make sure you research the zoning laws and try to negotiate a contingency clause, which would make the lease binding only if zoning is approved.
You can find out more about applicable zoning laws by contacting your local planning agency. For example, for New York City zoning issues, you can contact the NYC Department of City Planning.
Once you secure a lease, you’ll have to customize the space to the needs of your business in a process that is commonly referred to as tenant improvements or a “build out.” Depending on the type of industry you’re in, build outs can take as little time as a month and as much time as over a year. Check the language of your lease for clauses that might prohibit the improvements you have in mind. Negotiate for a clause that specifically allows for what you have planned or for a broader description of “all legal uses.”
As you envision how your commercial space will look, it’s important to keep in mind other considerations such as building inspections and Americans with Disabilities Act (ADA) compliance. Check out this guide for small businesses by the U.S. Small Business Administration and U.S. Department of Justice.
Samantha Novick is a senior editor at Funding Circle, specializing in small business financing. She has a bachelor's degree from the Gallatin School of Individualized Study at New York University. Prior to Funding Circle, Samantha was a community manager at Marcus by Goldman Sachs. Her work has been featured in a number of top small business resource sites and publications.