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Commercial Leases
Whether you are a small business starting out on a new venture or an experienced operation, commercial leases are daunting. If you are not familiar with commercial leases, you will immediately recognize the difference between it and residential lease agreements. Whereas a residential lease agreement may be just a few pages long, a commercial lease agreement will generally average 30 pages and can go up to nearly 100 pages worth of terms and other contractual language. For many entrepreneurs and other small business owners, this may seem like overkill and in many respects they are right. But they must recognize that the proposed commercial lease is just that: proposed. It is subject to negotiation and amendment. And a small business tenant should recognize that a commercial lease is certainly not written in their favor and no amount of negotiation will turn that lease back into their favor. The most that a small business tenant can hope for is to negotiate a lease back to a point where it is protected, yet still affording the landlord its normal rights. The work an attorney may do in negotiating a commercial lease may never come into play if you are able to fulfill all the terms contained therein. But if a problem should arise in the future, the attorneys work on the front end will be realized and most small business tenants and even landlords will be happy for that work.
In our experience there are many common limitations and restrictions in a commercial lease that a tenant should be mindful of. Here are a few examples:
Exclusivity Clause. Any small business tenant wishes for as much business as possible. A commercial tenant should always include a paragraph in their lease that provides them exclusivity as to their product or their service. For instance, if your small business makes doughnuts it would behoove you to include a provision or paragraph in your commercial lease that restricts the landlord from placing another tenant in your retail complex that also makes and sells doughnuts. If that clause is not in your commercial lease, the landlord is free to put competition next door to your store, which could spell doom for the future success of your business. Inherent in this exclusivity clause issue is defining what your mission is. In the previous example, if you bake and sell doughnuts but you also serve coffee and selling coffee is a major aspect of your business, be sure to expand the exclusivity clause to include coffee as well as doughnuts. Ambiguity will cause lawsuits in the future and we always encourage any issues of this nature to be fleshed out at the onset of the lease.
Common area maintenance charges (CAM). Any small business tenant should be mindful of CAM charges. These are the charges that the landlord would pass along to the tenant for such costs as security on the premises, lawn maintenance, and the light bills for the parking lot. Those charges seem reasonable and normal as they benefit everybody at the retail complex. The problem for many commercial leases is that the landlords will try to include any conceivable cost that they may ever have against the tenant and label that cost as a CAM charge. For instance, if the landlord decides to repave the parking lot, can it pass along a prorated CAM charge in the amount of thousands of dollars to the tenant? Furthermore, a tenant should have some expectation as to future increases of those cams and should draft that into the Lease.
Personal guarantees. While your counsel may preach against a small business debtor signing a personal guarantee for the business, it is next to impossible to avoid it. Simply stated, your small business is likely not worth much and landlords require some type of protection in the event of a default and the personal guarantee provides that protection. Notwithstanding, that does not mean that a tenant cannot amend or try to limit the personal guarantee. For instance, a small business tenant may argue that the personal guarantee should only be in effect for the first few years of the lease. The rationale is that by that time the small business has shown itself to be successful in the danger of default is lessened. A small business tenant may also negotiate a higher deposit in favor of some limitation of the personal guarantee.
Commercial leases are complicated. For many small business owners they are not capable of dealing with it on their own. Experience attorneys at Arnold & Smith, PLLC have extensive experience drafting and negotiating commercial leases. If you would like to set up a consultation, please not hesitate to contact us.
