Negotiating a lease for an office, store or commercial space is a major step for any small business whether it is brand new or already in existence. The prudent small business owner will have first identified the amount of space the business needs for the immediate and long term, analyzed the logistics of the business and how its location affects its operations, consulted with realtors about the current rental market rates and visited the available sites. If there are competing sites, the business owner has the option of negotiating with multiple landlords to obtain the best deal.

At the start of negotiating the lease, there are two thoughts to be kept in mind. First, the commercial lease will always be extremely detailed and consists almost entirely of “boilerplate provisions” that the commercial landlord uses for all of its properties. The landlord’s willingness to negotiate changes to boilerplate provisions may indicate how flexible it will be with the small business if it becomes a tenant.  The landlord may or may not change the boilerplate provisions so the small business owner must be aware of what he/she is agreeing to. What you don’t know can hurt you. For example, many commercial leases contain arbitration clauses which require the tenant to arbitrate all disputes, typically under the rules of the American Arbitration Association.  South Carolina law requires that any agreement containing an arbitration clause must have a notice that an arbitration provision is included in the agreement prominently displayed on the front page. Arbitration can be a good thing if a simple problem arises over how some lease provision is being administered and the landlord and tenant can’t agree. Arbitration is relatively cheap and faster than going to court. If there is a dispute over something complicated and seriously affecting the tenant, arbitration may not be the best approach. An alternate approach to arbitration of all disputes would be to allow the tenant to raise any claims it has against the landlord if the landlord starts an action for eviction, which is usually specifically excluded from the arbitration clause.

Assignability of the lease is another boilerplate provision that is important.  The “assignability clause” gives the landlord control of the tenant’s right to find a replacement tenant if the tenant is unable to complete the lease for economic reasons or a prospective buyer of the small business appears.  If the lease allows the landlord to refuse to allow assignment for any reason (or in its “sole discretion”) the tenant is bound to perform the lease or must negotiate a termination with the landlord under what will be difficult conditions. The small business owner must understand the consequences of the assignability clause and whether changes will need to be negotiated. If the landlord agrees to allow the lease to be assigned, the “assignee” has the principal obligation of performance but the original tenant remains secondarily liable, and will also remain liable on any guarantees unless they are specifically terminated.   

The tenant should never accept any boilerplate provision offering the premises “as is”. The tenant must insist that the premises comply with all applicable zoning, government codes and ordinances, be mold/mildew free and environmentally safe. The tenant also should not agree to a limitation on the use of the premises, only if the use is prohibited by some government zoning, code or regulation. The landlord’s obligation for maintenance including parking lots should be carefully examined since these could directly affect the small business owner’s customers. 

Another example of a boilerplate provision that requires attention is the “rentable area” upon which the rent is based.   If the leased space is being carved out of an existing area that is irregular in size, ask the landlord to allow you, as the prospective tenant, to have area surveyed to insure that the rentable square footage upon which the rent is based is correct. That measurement can not only save the tenant rent that it would otherwise be paying, but may  also change the percent of common area expenses which the tenant is obligated to pay in addition to rent. Don’t rely upon a realtor’s representations of the size of the space, if rent is a big part of the small business overhead, have the rentable area measured.    

The second thought is that the small business owner must identify those terms of the lease that are critical to its business and must aggressively insist that they become part of the lease. The landlord is not likely to know what is important to the small business tenant unless the tenant insists upon it being a part of the lease.  For example, a commercial lease usually allows the tenant some period of time before the lease term begins during which the tenant can complete improvements in order for it to carry out its business. The landlord usually allows the tenant to complete its improvements without having to pay rent for all or a portion of this period.  The actual time of construction is only one of the things which determine the lead time; complying with zoning restrictions or other government regulations can add to the time needed for occupancy before the lease term begins. Be aware of all the government requirements that the small business needs to satisfy before asking the landlord for a specific period of “free rent”.  

If the small business is just starting, the owner may request that the landlord not rent to a competing business; and that a violation of this provision will cause a termination of the lease at the tenant’s option. Commercial lease often contain standard hours of operation after which the tenant may pay higher utility or other charges.  The small business owner will need to have flexibility in its hours of operation and should be careful about what limits the lease may impose or insist that they be changed.           

The bottom line is that the small business owner must be ready to accept limitations upon his/her ability to run its business when entering into a commercial lease. The small business owner must understand how its business may be affected by the lease and insist that the landlord agree to what is needed to insure that the small business can survive.

©Bertele Law