Ten things Tenants in New York State must know about the commercial lease review process- Know your Rights!
A guide by The Rozhik Law Firm
After months of searching, you finally found the perfect location for your business. The rent is reasonable, the size is perfect, and the landlord seems agreeable. You can already picture your company in this location. You ask to review the lease, and the landlord says, “Oh, it’s just a standard lease. Everyone signs it.”STOP! There is no such thing as a “standard” commercial lease. Review is always necessary, preferably by an attorney who can negotiate the various provisions to your benefit. Here are just some of the conditions that are negotiable and not nearly standard.
1) Personal Guarantees
Most landlords will likely ask that someone personally guarantee the lease. Typically, this is the principal of the LLC or corporation, but it does not need to be. A personal guarantor would be responsible for rent and any other payments due on the lease if the tenant, typically the LLC or corporation, does not pay. While this is exceedingly common, some limits can be negotiated. This may be one of the most critical points of a commercial lease review.
2) Competition
If the potential space is located in a shopping mall, or even if the same landlord owns several properties in a small area, you, as the tenant, may be able to negotiate a provision that would prohibit the landlord from leasing space to your competitor.
3) Common Area Maintenance Charges
Is there a parking lot that services multiple businesses or a building elevator all tenants use? There are likely monthly or quarterly charges for the maintenance of these areas. Reviewing the commercial lease to ensure that the authorities are explicitly enumerated is essential. These charges can be a percentage of actual costs or a fixed amount. No matter how the charges are calculated, the lease should stipulate how responsibility is designated and how often charges can be increased.
4) Term, Renewal, and Options
The initial term for most commercial leases is typically two to five years. Of course, there may be longer-term leases for businesses involved in manufacturing or otherwise have heavy investment in equipment. When negotiating the initial term, it is essential to focus on how much space the company will need as it grows. Focusing on renewal and options is critical when conducting the commercial lease review. A renewal typically involves another term similar to the first, where the rent is pre-negotiated. Generally, with a renewal, the tenant must simply let the landlord know by a specific date whether or not the tenant will stay for the renewal period. An option is the ability of the tenant to extend the lease, but the rent is usually negotiated at the point when the option is exercised.
5) Assignment and Subletting
Landlords restrict the tenant's right to assign or sublease the premises. Be careful before you agree to such a provision. Wording the condition can limit your ability to change the entity form or even take on a business partner. Tenants often do not consider the implications of these restrictions at the time of lease signing. However, any number of situations may arise that will result in a need to assign or sublease. What if you sell your business two years into a five-year term? It is an excellent idea to negotiate these restrictions at the outset.
6) Use Restrictions
It is essential to know how the leased space will be used and ensure that use conforms to the room. The lease may specify restrictions on equipment that can be installed or limit the load per square foot. Before signing the lease, ensure that your plans for the space will work within these restrictions. The lease may also restrict activities permitted in the area. Again, your business goals must be in line with these use restrictions.
7) Insurance
The commercial lease will require that you, as the tenant, maintain insurance. Review the type of insurance needed and the amount. Make sure the amount is reasonable for your business.
8) Tenant’s Work
In most situations, the tenant is responsible for the build-out process. When conducting the commercial lease review, carefully consider how much control the landlord has over the process. It is common for the landlord to require general construction plans and approval of those plans. However, ensure you can continue your work by seeking the landlord's consent at every step.
9) Notice of Default
The notice of default is the landlord's ability to terminate the lease early based on a default by the tenant. This right can either be at the landlord's option upon an insolvency or automatic upon that occurrence. If the request is automated, the landlord may begin holdover proceedings when there is a default.
10) Damage and Destruction of Premises
In the event of fire or other casualty, the landlord will be responsible for certain repairs. The commercial lease will stipulate the time frame and extent of work. Ensure these are reasonable and will not unnecessarily delay your repairs.