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Commercial lease agreements: what you need to know

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This guide outlines what every business owner should understand before entering into commercial lease agreements.

Signing a commercial lease agreement is a big step for any small business owner. The terms of the lease can affect your costs, operations, and ability to grow over time.

Before signing commercial lease agreements

While leases contain a lot of legal terminology, you can negotiate better terms and avoid surprises by following some key steps.

Do Your Research

First, spend time thoroughly understanding the different terms and clauses found in standard commercial lease agreements. You’ll want to be familiar with sections covering rent payments, rent increases, maintenance responsibilities, insurance requirements, default conditions, and termination rights.

Consult Professionals

While doing your own research is important, you’ll also benefit immensely from partnering with professionals who negotiate commercial leases regularly. Hire a seasoned commercial property solicitor to review the lease and look out for your best interests. You may also want to work with a broker to understand available spaces and current market conditions.

Make sure you understand what is covered in your base rent vs what you’ll be responsible for paying directly. This includes building insurance, maintenance, utilities, and other operating expenses. You may have to pay your proportional share of common area maintenance (CAM) fees for shared spaces.

Get a Property Survey

Consider hiring a reputable company to conduct a comprehensive survey of the building’s condition before signing any commercial lease agreements. This can identify any structural, electrical, or other issues early on so you enter the lease with full knowledge of existing problems. Look for a company that provides comprehensive building surveys, like Every Property Certificate.

Understand Use Rights

Commercial leases place restrictions on how you can use the space. Make sure your planned use is permitted by the landlord.

You don’t want to discover you can’t operate your cafe in an office building after signing. Also, look for clauses in commercial lease agreements that limit certain uses by other tenants.

Negotiate Favourable Terms

Don’t be afraid to negotiate better terms before signing commercial lease agreements. With the help of legal counsel, you may be able to get the landlord to provide a tenant improvement allowance, free rent period, or limit rent increases. Know which terms are flexible versus non-negotiable.

Build In Flexibility

Your business is likely to change over the lease term so try to negotiate terms that provide flexibility, such as a mid-term break clause.

For example, you could ask for a longer initial term but options to renew/extend later on fixed terms. Seek rights to make certain changes or sublease part of the space.

Review Maintenance Details

Clearly outline in commercial lease agreements who is responsible for repairs and maintenance on the building, premises, and equipment. Will the landlord handle heating and roof repairs? Who shovels snow and cuts grass? What fixes are you responsible for? Make sure it is all down on paper.

Limit Rent Increases

Rent will likely increase annually so try to negotiate clear limits on increases. Get fixed annual bumps rather than open-ended increases. Negotiate reasonable caps on any expense pass-throughs.

Follow Procedures

Once signed, be sure to follow all terms and procedures outlined in the lease. Pay your rent on time, maintain proper insurance, and report problems promptly. Thoroughly document all communications with the landlord.

Plan an Exit Strategy

Ideally, your business thrives long-term in the space but it’s wise to understand how to exit commercial lease agreements if needed. Review options for subletting, assigning to another tenant, or negotiating an early termination.

Conclusion

By taking the time to understand commercial leases and advocating for your business, you can sign an agreement that sets your company up for success. Don’t hesitate to ask questions and lean on professionals who can negotiate favourable terms.

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