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What happens during a commercial lease review?

| Sep 18, 2020 | Leases

Establishing a new location for your business is an exciting time, and many franchisees may feel tempted to sign a lease without fully understanding the details or without negotiating changes to the legal terms that can have a critical future impact on the business. However, if you want to avoid any serious errors that could impact your business, it is essential for you to understand all aspects of your commercial lease agreement before you sign, so it is wise to talk to an experienced lease attorney to conduct a commercial lease review.

Here’s what you should know about the commercial lease review and negotiation process and how it can help you.

An investment in your business

You likely already understand that a commercial lease is an investment in your business. Obtaining a review of the lease helps you understand more about the lease, the points that can be negotiated and terms that could cause you problems in the long run.

Like many contracts, commercial lease agreements are often riddled with jargon from both the real estate and legal worlds. Many franchisees may not be familiar with some of the terminology that is often used by both of those sides. Taking the time to work with an experienced attorney to review your commercial lease agreement could save you from signing a lease with terms that are extremely detrimental to your business and to you personally.

An easy-to-understand explanation

Part of negotiating a commercial lease agreement is understanding what the landlord may include in the contract and what terms and conditions would be more beneficial for you and your business.

When you work with an experienced attorney, you will gain an understanding of the rights and obligations of the parties to the lease. An attorney can translate complex contract language into terms you can understand.

Opportunity for negotiation

Unlike some other contracts, a commercial lease agreement is typically highly negotiable. Business owners often feel like the contract is made up of boilerplate terms that the landlord will not be willing to change, or that the negotiations of the business terms by the local real estate agent is sufficient.  These assumptions are completely false.

While there may be some terms in the agreement that the landlord is unwilling to negotiate, there are still opportunities for you to make sure the terms will fit the needs of your business, including:

  • Signage. Will the landlord approve the sign you want or are required to use for the business?  Will the local municipality approve the sign?  What happens if they do not?  Do you still want to move forward with that location for your business?  Before you proceed with your commercial lease, it is wise to find out from both the city and your landlord about the details regarding your signage limitations. It is important to negotiate the ability to terminate the lease if you are not able to obtain signage approval from the landlord or the local governmental authority.
  • Assignment.  It is important to ensure that the lease provides you with the right to assign the lease to another franchisee, the franchisor or anyone else to whom you wish to sell your business.  Too many conditions or costs to the landlord’s approval of an assignment can cause the sale of a business to be held up for weeks, months or possibly fall through altogether. This is a critical clause to negotiate in a commercial lease.
  • Personal Guaranty.  A personal guaranty (meaning that the individual owners of the entity that is the tenant are guaranteeing the obligations of the tenant entity) should be limited.  There are many ways to limit a personal guaranty that can be negotiated. Additionally, on a sale of the business, it is essential that the personal guaranty be released so the owners of the tenant entity are not continuing to guaranty the financial obligations under the lease of the new owners of the business.
  • Operating expenses. Depending on the agreement, you may be obligated for certain operating expenses that are paid on a prorated basis by all tenants. As part of our negotiations of commercial leases we negotiate a list of 28 exclusions from charges that can be passed through to you as a tenant for the operating expenses of the common areas.  This can save you on your bottom line each month.
  • Relocation. You and your customers build a relationship that starts at your new location. Your lease agreement could include terms that allow the landlord to require you to change locations. However, you must proceed with caution. A relocation could be quite detrimental to your business. Customers may have difficulty finding you after the relocation, you may not have the same visibility or accessibility for customers and the costs of relocation can be quite high (imagine signage, stationary, closure for the moving period, moving costs, etc.).  What about if your business is seasonal or has peak times of the year and the landlord wants to move you during one of these peak times? These types of terms are highly negotiable.

In some cases, business owners sign an agreement only to find out there are terms that will interfere with how they intended to conduct their business later on. When you use an experienced attorney to help you review the agreement and negotiate some of these critical terms, you can avoid any unnecessary surprises after it is too late.

It pays to talk to a commercial lease attorney

Entering into a commercial lease can be a significant investment for you and your business. While you may be looking for different areas to save money, skipping a commercial lease review could make your lease more expensive in more ways than one.

During a commercial lease review, an attorney can help you understand the conditions of the agreement and the costs your landlord could charge if you do not follow the terms, or if you need to get out of the lease. It is crucial to understand both the terms of the agreement and the remedies your landlord has available for enforcing the contract before signing your name on it.

The remedies your landlord has available can feel intimidating. Still you should also know that a well-negotiated agreement will have remedies for you while also placing several limits on what your landlord can do.

It is easy for franchisees who are excited about the next phase of their business to quickly scan the agreement and gloss over problematic terms that could hurt them. For example, a personal guarantee could mean that the landlord could hold you liable for the entire term of the lease if you fail to fulfill an obligation early on. If you negotiate this and other terms, you can limit the amount of a potentially significant financial burden.

Someone in your corner

There can be several people involved in a commercial lease agreement, but not all of them are there to look out for your best interests. While they may benefit from having an agreement that works for everyone, brokers, franchisors and landlords are all looking out for what is best for them; not you.

Hiring an experienced attorney to help you review and negotiate the terms of a commercial lease agreement ensures that someone is looking out for what you want and what you and your business needs from the agreement.

At Lanard and Associates, we have the necessary experience to help you with this agreement and we charge a modest flat fee for your commercial lease review. Hiring an attorney can help you negotiate terms that work for you and your business. Call us today for a free initial consultation.