One of my functions as a business attorney is to review a lease. There are certain set provisions I look for in a commercial lease as I discuss all of the below. The goal here is to empower small businesses through education.
USE: This provision usually discusses what business activities are allowed or prohibited on the leased property or leased premises. This can be very critical for your business from a business planning perspective because you may want to expand/pivot your business or even sell your business in 5 years. You want to keep the permitted “use” broad so that there are no issues in the event you want to expand, pivot or sell your business.
INSURANCE: Your insurance requirements are usually laid out in your lease, however, are they really applicable to the type of activities you’ll be conducting in your rented space? The first thing I advise clients to do is talk to a commercial insurance specialist. Find out if what the landlord is asking for in terms of insurance is reasonable, and what it will cost you. Often, landlords may just carryover insurance requirements from other leases without knowledge of whether those insurance requirements are applicable. It doesn’t hurt to ask a professional.
RENT AND COMMON AREA MAINTENANCE CHARGES: Checking to see if the monthly and annual rent are correct seems like a no brainer right? But what about the common area maintenance charges or “CAM” as they’re commonly referred to as? What will you be responsible for paying with respect to the common areas or operation costs for the property? Will it be 100% or a percentage of the total, and if it’s a percentage, is that percentage reasonably related to the size of the space you are renting?
TAXES: If the lease requires you to pay real estate taxes, then generally speaking, taxes should be paid in proportion to the size of the space you are renting. So if your rented space is 5% of the total building then you should be paying 5% of the real estate taxes. More specifically though you’re going to pay a percentage of the yearly increase in real estate taxes. So if your first year is your “base year” as it’s commonly called, and assuming the taxes in the base year are $10,000, and assuming the taxes in year 2 are $15,000, then the lease should require you to pay a percentage of that $5,000 increase in taxes.
ASSIGNMENT AND SUBLETTING: Not all leases permit you to assign the lease or sublet your space. If they do, it may require the consent of the landlord and may require the assignee of the lease (incoming tenant) to meet certain landlord requirements such as providing certain financials (bank statements, credit reports, bank statements) to confirm the financial viability of the incoming tenant, and so on.
These are the lease provisions that stand out as being in general the first things I look at when reviewing a lease. It will also depend on whether the tenant anticipates doing any work in which case we may want to discuss a more extensive provision or separate rider pertaining to that work.