The Lucifers Lurking in your Lease
By Nina L. Kaufman, Esq

Moving from home office to commercial space is a big leap in the life of a small business. The obligations you take on in a commercial lease can become your largest single monthly expense...and your largest single exposure to risk.

Patricia found this out the hard way. Her fragrance and cosmetics business was growing. As demand increased, so did her need for more space to accommodate inventory and employees. The ten-year lease for the new space demanded a personal guaranty. Then, four years into the lease, the economy softened and Patricia's sales contracted. Patricia tried to get out of the lease, but the landlord feared leaving the space empty and held her to its terms. When she defaulted, the landlord sued the company and Patricia - and won. The judgment was enough to push the now-fragile company out of business and Patricia into bankruptcy.

Lex Appeal logoWhat might Patricia have done differently? Had she focused more on the potential for risk in the lease, Patricia might have identified terms to negotiate more favorably. While leases should always be reviewed with legal counsel, know that there are five major areas in most leases to be wary of:

1. Additional Rent - Rent is rent, right? Wrong. Landlords will pass along extra charges to you, the tenant, because you are occupying the space. Lumped under the category of "additional rent" (and defined as such in the lease), your failure to pay them becomes just as serious an infraction as failing to pay your rent for the space you occupy. "Additional rent" usually includes everything other than your fixed (that is, basic monthly) rent, such as real estate taxes and charges for water (hot or otherwise), sewer, gas, steam, electricity, light, heat, power, and services supplied to your premises.

They may also charge you for a proportion of maintenance costs for common areas. Some unscrupulous types may try to take advantage by apportioning more than your fair share of these charges to you. For example, Patricia's lease specified that she would pay 10% of all additional rent charges incurred by the landlord. However, her premises occupied only 5% of the building. Had she inquired, she might have been able to reduce her percentage to conform to the proportion of space she actually occupied. As the economy softened, and local real estate taxes skyrocketed, these costs were also passed along, disproportionately, to Patricia. In addition, with utilities, are there dedicated meters or does the landlord charge you a percentage of the total expense incurred by the building? If the latter, try to get estimates on utility costs.

2. Maintenance and repairs - Especially when leasing storefront property, maintenance and repairs can add significantly to your monthly nut. Many leases specify that the tenant who occupies the street level must remove snow and ice, other obstructions or debris, and clean dirt (even graffiti!) in front of or on the premises. If you don't do so, the landlord may, and will bill you. Not surprisingly, these charges tend to be higher than the ones you might pay if you hired someone yourself. Tenants are also generally responsible for maintaining sprinkler systems, repairing air-conditioning and heating units, handling repairs (that do not affect the structure of the building), and removing garbage from the premises.

Other costly, and unplanned, situations can arise. For example, leases can also include a tenant's responsibility for repairing pipes, plumbing lines, electrical lines, appliances, and other systems located in and around the premises. Robert, a restaurant owner, had a flood caused by a blockage in the pipes under his kitchen floor. Because the flood occurred in his portion of the building, Robert - and not the landlord - had to pay for the repairs, even though another tenant had created the underlying problem.

3. Destruction, fire, and other casualty
- Leases always favor the landlords who prepare them. If the premises are damaged by fire or other casualty, leases often give the landlord (not you) the option to repair and restore the premises or to terminate the lease. Should the landlord opt to repair, leases can grant landlords a significant period of time to fix the space.

Although you, as the tenant, are usually not responsible for paying rent during that time, a practical question emerges: what happens to your business? Do you have a contingency plan, bearing in mind that, once repaired, you will have to return to the premises and resume paying rent? It may be difficult to find space, reestablish yourself in new surroundings, only to have to uproot yourself again once the old premises become available. This is an area where it pays to investigate business interruption insurance. In addition, landlords often do not have to restore the space to perfection; only to being "substantially ready." What "substantially" means can be the stuff of lawsuits. Nonetheless, once the premises are "substantially ready," your obligation to resume rent payments kicks in, usually within a week.

 

Next: Terminations, Defaults and Guarantees

 

GoDaddy.com $7.49 .com

© 2004-2009 The Legal Edge LLC.  Want to save time, money, and aggravation with pesky business law issues? Award-winning business lawyer and Entrepreneur Magazine online columnist/blogger Nina Kaufman has user-friendly business law resources for entrepreneurs that demystify legalese. Get your free copy of her Entrepreneurs Business Law Primer from GreatBusinessLawResources.com today!


Follow locationisland on Twitter
Entrepreneur's Prenup logo
Bookmark and Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location Island button logo

[REAL ESTATE] [CONSTRUCTION] [LEGAL] [FINANCE] [RESOURCES]

[HOME] [ ] [PRIVACY POLICY] [TERMS OF USE] [PRESS] [ABOUT US] [ADVERTISE]