4 Things To Know Before You Lease Your First Commercial Space
If you’re just starting out and looking for a commercial space for your small business – or opening a storefront after selling online only – you know how important it is to find the right location but you also need a lease agreement that matches your budget and specific needs.
Just like a residential rental agreement, a lease to rent a commercial space is a binding legal document but experts warn that it can be more complicated and tends to lean more in favor of the landlord, i.e., maximizing their profits.
“As a result, you need to review every small business lease carefully and negotiate for any modifications you want—from late payment penalties to the terms surrounding a potential lease break and even how and when your rent is due,” writes Rieva Lesonsky, CEO of GrowBiz Media, in an article posted on Fundera.com.
Landlord-tenant issues often arise after a lease has expired and the landlord continues to accept the rent without providing new lease terms, says Gregg Bishop, commissioner of the New York City Department of Small Business Services, in an Entrepreneur article by associate editor Hayden Field.
“The lease is the most important instrument in terms of protecting you for future potential issues that you'll have with your landlord,” he says. “It spells out how each party will respond.”
Here are 4 tips on finding the right location and signing a deal for your small business to rent a commercial space.
1. Know The Market
Once you identify a space for your small business, make sure you do some homework on the area’s commercial real estate market before you start negotiating a lease.
Get an idea of what other similar commercial space is going for and what kind of demand there is for space – just having the information will give you a sense of your negotiating power.
For example, if there are several similar spaces on the market you may have more leverage in negotiations. However if inventory is scarce and rents are at a premium, you’ll go in knowing where you stand – the landlord could be less willing to change the terms to accommodate your budget needs.
2. Ownership Changes
Make sure your lease on the new commercial space addresses terms that create the best scenario for you in the event the property changes ownership.
What you don’t want, Bishop says, is an “escape clause,” which could allow a new owner to void your lease once a purchase goes through and offer new terms and higher monthly rents.
“You can protect yourself as an entrepreneur by ensuring that if ownership changes, the lease terms do not change,” says Bishop in the Entrepreneur article.
3. ‘Good Guy Clause’
Be aware that even if you operate an LLC (Limited Liability Company), a commercial lease may include a requirement for you to be the “personal guarantor.”
“In other words, you’re promising to personally take on financial responsibilities for the space if the LLC ends up falling short,” says McConnell.
If you do agree to be a personal guarantor, McConnell recommends making sure the contract also has a “good guy clause” as a protection if you end up having trouble paying rent. The clause will require the landlord to provide you a specific amount of time – up to 60 days – before the lease is voided and you must vacate the premises.
4. Beyond Your Space
If you’re looking to locate your business in a building, office park, or shopping center with other commercial space, there are two clauses you might want to include when you go to negotiate your lease.
Keep the other tenants in mind “because they can make or break your business,” writes Lesonsky on Fundera.com.
One clause you might want to include is some type of “exclusivity clause” to keep the landlord from leasing to “direct competitors” at the property, whether that means in the same building or commercial center. Also be sure to define what a “direct competitor” to your business means within the lease agreement.
Lesonsky also suggests a “co-tenancy clause.”
“If a key anchor tenant (such as a large retailer that attracts lots of customers) moves out of the development, your business may suffer,” she writes. “In this situation, a co-tenancy clause gives you the option to break your lease or reduce your rent if the landlord doesn’t find a replacement for that tenant within a certain time.”