Business owners have a great deal of control over how they run their business. However, other parties can influence operations.
For instance, if you open a business and lease commercial space, landlords can include terms in your lease that restrict or require things that affect how your manage your company. Below are four types of clauses to watch for if you are thinking of leasing commercial space.
- Term: A lease should clearly lay out the term or length of the lease either in months or years. Along with the initial term, the lease should contain information about renewal options, as well as termination options should either you or the landlord want to end the lease early or once the initial term is over.
- Rent clauses: A lease should clearly spell out monthly or annual rent amounts, but that is not the only rent-related matter you may find in your lease. You might also find a clause that specifies rent increases and rent structures. For example, leases for many bars and restaurants contain clauses requiring the bar or restaurant to meet minimum monthly sales amounts, and there will be additional rent assessed based on a percentage of those minimum monthly sales. There should also be information detailing what happens if a tenant is late in paying rent, penalties for late or unpaid rent, and whether there are circumstances under which they have the right to stop paying.
- Improvements and alterations: Every space can require maintenance and changes, and your lease should provide instruction for whether tenants have the right or responsibility to do these things. It will also address who pays the associated costs. Pay close attention to these guidelines, as they could have a significant impact on your operational expenses.
- Use clauses: You might assume you can use the space you lease as you see fit. However, use clauses in your lease could change your plans. For instance, depending on the details of a use clause, you may not be able to put up the signs you want or expand into a new business in the space. There may also be clauses that restrict when and if you can cease operations, such as a go dark clause.
- Dispute resolution rules: Should a dispute arise between a landlord and tenant, a commercial lease will typically dictate how parties should resolve the conflict. For instance, it might specify that parties must mediate or arbitrate a matter instead of going to court.
- Personal Guarantees: Often times landlords will require an individual person, either the owner, officer or member of the business to sign a personal guarantee which obligates the guarantor to personally pay rent and/or other costs associated with the lease in the event the business defaults on the lease. The length of the personal guarantee and the extent of the obligations contained within it can vary greatly so be sure to review the terms carefully.
These clauses can dramatically impact the way you run your business, so it is crucial to be mindful of them and review them closely before signing a lease. If there are unfavorable terms, you might negotiate with the landlord or find a different space to avoid having a lease hold you – or your business – back.