How to Spot Unfair Commercial Lease Terms
How to Avoid Agreements That Favor a Landlord
Signing a commercial lease is a huge financial commitment. If you default, your landlord could come after you or your business for payment on the lease. It is critical that you only sign a lease with terms you understand. If you are not sure about the legal wording in a commercial leasing agreement, it is well worth having an attorney review it with you before you sign anything. Here are a few "red flag" warnings to help you recognize a potentially bad leasing deal.
A Lease for More than Two Years
Getting stuck with a long-term lease is a terrible burden for all small business owners. If you need to break the lease for any reason, you will have to keep paying on the lease until the landlord can rent the space to someone else. Since you are financially committed for the duration of the lease, a landlord has little incentive to try and find another renter.
During economic slumps, landlords are desperate to rent space and may try to coerce you into a lease commitment of 3 to 5 years. Do not do it. A one year lease with a good renewal clause is best in uncertain times.
But if your landlord will not take a one-year lease and you want the space, go for a two-year lease -- but never for a longer period of time. The longer you commit yourself, the more you limit your business when it outgrows lease space or if you need to change locations for any reason.
Long-Term Lease Renewal Clauses
Be wary of a lease that requires you to commit to a renewal of more than two years at a time. Unless you are already independently wealthy, do not do it. Your business could grow, you could relocate, or even need to downsize. An initial one-year lease with a renewal clause of five years is not a good deal for the tenant. You will be forced to move in a year or commit to staying in the space for a long, long time.
Renewal Clauses That Are Unclear or No Option to Renew
Never sign a lease that does not give you an option to renew unless you only want the space temporarily. Renewal options should clearly state how long you will need to renew the lease and the exact rate of increase in rent if you renew.
Forfeiting Legal Rights
In some cases, an agreement that tricks or forces you to give up certain rights may not be enforceable. But why take the chance? Never give up your right to take legal action against a landlord.
"You Can Trust Me"
Never trust a landlord (or listing agent) that asks you to rely on an oral transaction and "trust." All terms of your lease should be in writing. It protects you and your landlord. A landlord that says "do not worry, I always fix things" but does not put into an agreement what they are responsible for is not going to fix anything to your satisfaction.
It also holds true for renewal terms. Never rely on promises for the future. If you need renewal options, they absolutely must be written into the original lease. It is a business. A landlord that does not put things properly into writing is not a good business person.
Triple Net Leases
If your landlord is asking you to pay rent, and his taxes, his insurance, and his maintenance fees, do not do it. It is known as a "triple net" (NNN) lease, and they always favor the landlord.
Vague and Unrestricted Fees
Some landlords may try to pass along the direct cost of large common area maintenance (CAM) and repairs to their tenants. Any CAM fees you need to pay should be spelled out in your lease.
You should never have to pay "occasional" expenses or "unanticipated" increase in expenses. It includes paying salaries for landlord or property management staff or contractor fees, major repairs or renovations (you should not have to pay for a roof that suddenly collapses), or an unexpected tax bill for your landlord.