5 Common Questions on Commercial Leasing From the New Business Owner
Aren’t all commercial leases the same?
No, all commercial leases are not the same. In fact, the same landlord can have different lease terms for different tenants in the same shopping center or office complex. The terms and conditions of each landlord/tenant relationship will be governed by the actual lease signed by the parties. Unless a lease term is deemed “against the public policy” of the State of Georgia, even the most one sided or unfair lease term will be enforced. While some landlords are less inclined to negotiate lease terms, most of the time lease terms can be successfully negotiated to be more favorable to the tenant. An attorney who is knowledgeable in the area of commercial leases can be very helpful in negotiations. It is wise to remember many landlords have an attorney draft the lease for their maximum benefit. If no changes are negotiated on behalf of the tenant, the landlord will always be favored under the lease terms.
What is a “fair market rental” for the space I want?
The fair market price for different types of rental spaces varies by location. The rental rate is based upon a number of factors, including current supply and demand. A seasoned attorney can often help you determine if the rate requested in the lease is “fair” based upon numerous market factors.
What is “additional rent”?
Under most commercial leases, the tenant is responsible for a fixed monthly “base rent” usually based upon a price per square foot of the space leased. The tenant may then also be responsible for “additional rent” for other items such as common area maintenance (often called “CAM”), taxes, or insurance. The “additional rent” items may be collected as part of the regular lease payments or the tenant may be invoiced for some or all of those items separately. Each individual lease must be reviewed carefully to determine the tenant’s actual financial obligation.
The space needs to be changed to fit my needs. Who is responsible for the changes?
Leasehold improvements should be negotiated as part of the lease. Improvements can be made by the Landlord or the Tenant. In some instances a leasehold improvement is classified as an asset which can be depreciated over time for tax purposes. Additionally, it may be the intention of the Tenant to remove certain “improvements” at the conclusion of the lease term. Such “Tenant improvements” are only temporary and must be clearly identified in the lease. All necessary improvements add to the complexity of negotiating a successful lease.
My business is new. How do I know how long of a lease term I will need?
Estimating the length of a lease term may be challenging. It is an unfortunate fact that many start-up businesses are not successful. If your business is not successful, you may find yourself in a situation where you have to close the business. Depending upon the terms of the lease, this may result in liability for rental due for the unexpired lease term. This can be particularly concerning as many landlords require the principals of a new business to sign personal guaranties. A guaranty can create liability for the person signing for all lease terms, including accrued and unpaid rental obligations. Alternatively, if the business is very successful the landlord could use it to their advantage in negotiating future lease terms. The smartest option in determining the length of the lease would be to negotiate a shorter initial lease term with one or more renewal options.