Most small businesses choose to lease, instead of own, their primary locations. Commercial leases usually last for 3-5 years and sometimes longer, which means they are very important contracts with tens of thousands of dollars at stake. When negotiating a lease, there are a multitude of considerations that need to be taken into account.
Commercial vs. Residential Leases
Do not assume that the lease for your business can be handled just like residential leases you have encountered before. Unlike most residential leases, commercial leases frequently include significant customization. As such, many of their terms may be open to negotiation. Commercial leases last for multiple years (usually 3-5 or more), while residential leases are usually 1 year only.
Commercial Office Leases
Renting office space involves more than just finding a good location. Numerous legal issues are implicated in negotiating the lease. Each of the following should be discussed and agreed upon before any commitment to lease office space is made:
- Snow/ice removal
- Heating and air conditioning
Commercial Retail or Restaurant Leases
When negotiating a commercial lease for a store or restaurant, important questions to discuss include:
- Incentives – What incentives, such as rent-free periods at the beginning of the lease term, are available?
- Rent increases – How much does rent increase over the term of the lease?
- Common areas – Who is responsible for maintaining common areas?
- Signage – What common signs exist, and what is the cost of additional signage? What restrictions on freestanding signs and other displays are there?
- Build-out – How long is the build-out period? What restrictions are there on construction? How extensive will construction be?
- Competing businesses – If the property is a strip mall or other multi-unit location, will the landlord agree not to accept other similar or competing businesses as tenants?
Single Net, Double Net, and Triple Net Leases
- Single net leases: the tenant is responsible for rent and property taxes, but the landlord still pays many of the expenses associated with the property
- Double net lease: the tenant pays rent, property taxes, and building insurance, and the landlord pays only for capital repairs and common area maintenance
- Triple net lease: the tenant pays rent, property taxes, building insurance, and maintenance
The lease types above are listed in order of increasing financial responsibility on the tenant. The triple net lease, for instance, is usually used with a single-tenant building where the landlord doesn’t need to be responsible for any common areas.
Some leasing transactions require legal documents beyond the lease itself. Examples of such documents include:
- Assignment and sublease landlord consents
These legal agreements should be drafted and reviewed by an attorney to make sure the business is protected.
Unless your customer pays you in cash at the time of sale, you will probably encounter a number of situations with a high risk of nonpayment. For a small business nonpayment can seriously impact profits and cash flow.
All of the normal benefits of real estate ownership accompany the decision to buy for your business. You will build equity, have greater freedom of use with the property, and save on rental expenses.
A number of federal laws and bureaucracies regulate the health and safety practices of small and large businesses, including the Occupational Safety and Health Administration (OSHA) and the Environmental Protection Agency (EPA).
Kraemer, Manes & Associates LLC “KM&A” is a law firm serving all of Pennsylvania with our principal offices in Pittsburgh and Philadelphia. Call KM&A in western Pennsylvania at 412-626-5626 or in eastern Pennsylvania at 215-618-9185. KM&A can be reached by email at firstname.lastname@example.org.