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What businesses need to know about commercial leasing

Companies that are leasing their own space for the first time are often surprised by the terms of a commercial lease – and even companies that have leased space before sometimes overlook important points where they might be able to negotiate matters to their advantage. Here’s a quick guide to what to look for:

Letter of intent. This sets out the basic terms of the agreement so everyone is on the same page before a formal lease is drafted. Be careful – the document should say that it’s non-binding. You don’t want to sign a general expression of interest and suddenly discover that it’s a legal contract.

Rent. Commercial rent is more complicated than apartment rent. In addition to the “base
rent,” there can be separate charges for metered electricity, janitorial services, excess utility use, and personal property taxes. In addition, you may be charged a share of expenses the landlord incurs in operating the building. Sometimes there is a “base year” for these expenses, and you’re charged a share of any increase in expenses over the base year.

Other terms. Besides rent, you’ll want to consider whether the other terms of the lease meet your needs. These can include the security deposit, building access, kitchen use, telephone and Internet service, rules for pets and bicycles, and so on. These terms are often fertile ground for negotiation.

Build-out. If the space is going to be built out, you almost always want to insist that the landlord perform the work itself at its cost. This might result in higher rent, but it’s worth it. If you’re not in the construction business yourself, you don’t want to bear the risk of contractor delays and compliance with the many complicated laws that are involved in the building process.

Insurance. Commercial leases often require the tenant to indemnify the landlord in the event something goes wrong with the property – even if it’s not the tenant’s fault. Indemnities can be negotiable, although a small tenant in a big property might not have much leverage. You’ll want to make sure you have adequate insurance to cover whatever indemnities you agree to – and in fact, the landlord might require proof of such insurance.

Personal guarantees. In general, avoid them at all costs. The business entity should be the one signing the lease.

Subletting. Look carefully at the lease’s provisions on assignment and subletting. What happens if you share space with another business? What happens if you bring in an outside investor, with the result that there’s a technical change of ownership? You want to understand all these issues upfront, before you sign.

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