Preparing to sign a business lease can be exciting! You’ve found what seems to be the perfect location, and you’re ready to get the ball rolling. But before you agree to anything, there are a few steps you should take in order to minimize risks.
We spoke to Todd Sivia, a licensed Illinois and Missouri attorney and Illinois Managing Real Estate Broker, to learn how entrepreneurs who are ready to sign a commercial business lease can ensure they’re making a smart decision. Sivia was recently featured on Small Business Revolution — Main Street, as he advised the owners of Lovett’s Soul Food on their precarious rental situation.
Here are Sivia’s nine tips for business owners:
1. Know the common elements of a commercial business lease
Though some elements may change based on the specifics of your contract, every commercial lease agreement should include the names of the parties entering into the lease, the date the lease will begin, the price, and which party is responsible for the property’s upkeep (insurance, maintenance, etc.). The name is particularly important because whoever signs the lease will be largely responsible for the lease terms. If a party signs personally, they will be responsible for the lease.
Merry Lovett and Brad Chavours, owners of Lovett’s Soul Food, ran into trouble when their landlord refused to repair a broken window and awning at the restaurant. The business did not have a lease for their space — which severely limited their negotiating power with the building owner.
2. Review the major types of commercial leases
You will have a better idea of what to expect as you prepare to negotiate a lease if you have some familiarity with the three major types of commercial real estate leases:
- Gross lease/full-service lease: The tenant’s rent covers all of the costs associated with operating the property — this includes property taxes, maintenance/repairs, utilities and so on.
- Net lease: The tenant pays rent plus some of the costs associated with operations, such as utilities or insurance. In a double net lease, these costs may also include property taxes in addition to utilities and insurance. In a triple net lease, the costs include property taxes, insurance and maintenance/repairs.
- Percentage lease: The tenant pays rent plus a percentage of the revenue the business brings in. This type of lease is often found in retail scenarios.
3. Think about your business goals before entering into a lease
Sivia suggests that small business owners envision the future of their business before signing a commercial lease agreement. “Ask yourself what the business is going to be,” he says. “Is the space that you’re leasing enough for the long haul? If you get too small a space in the beginning because that’s what you can afford, will you have an opportunity to grow? If the space is big, are you going to be able to grow into it?”
4. Have a professional negotiate the lease for you
If you’ve never negotiated a lease before, it may be difficult for you to determine what the landlord is willing to give, or if this is the right deal or even the right location for you. “I’ve had clients who didn’t come to us first and we end up having to get them out of a lease that they shouldn’t have ever been in to begin with,” Sivia says. “It can cost you more to get out of a bad situation than it would to have an attorney look at the contract ahead of time and make sure everything is in place before you sign on the dotted line. You can think of it as preventive maintenance.”
Lovett’s Soul Food turned to Sivia Law to negotiate the lease proposed by the landlord. The initial agreement had numerous problematic clauses. The business owners were shocked to learn their landlord had the power to evict Lovett’s if and when he sold the building.
5. Find an attorney who has negotiated leases before
It’s important for business owners to find an attorney they can trust and who has experience in the right field. You may have a friend who is an excellent personal injury lawyer or a great litigator, but that doesn’t mean that they should be the one to negotiate your business lease.
“There are people who are familiar with real estate transactions and know what to look for,” Sivia says. “For instance, there’s a difference between negotiating a lease in New York and negotiating one in St. Louis. An attorney who is familiar with the area that the property is in, and familiar with real estate in general, will catch things that a less-experienced attorney would miss.”
6. Remember that it’s not always about getting the lowest rent
Finding the least expensive location might seem like it should be your top priority, but there are times when it may actually benefit you, and the future of your business, to pay more in rent. “If the rent for a certain location is high, but the area attracts your target clientele, it could be worth it in the long run to pay more,” Sivia says. “And by paying more, you may be able to lock in a lower-term lease. Make sure to find out what incentives are being offered — they may make the higher rent worthwhile.”
7. To determine whether you should buy or lease, figure out what you’re passionate about
Are there instances when it makes more sense to buy a property rather than lease it? According to Sivia, you first have to ask yourself what you’re in business to do. “Are you in the business of owning and managing real estate? Or are you in the business of being a florist or a restaurateur? If you want to own real estate long term, it has to be feasible and it has to fit into your long-term vision.”
Before you jump into buying a property, you need to be sure that you’re ready for the additional challenges — such as taking care of all maintenance issues — and you have to prove that you’ll be successful. “If you’re starting out and don’t have a proven track record, buying commercial real estate right out of the gate might not be the wisest move,” Sivia cautions. “But you can always negotiate the ability to buy the property within a lease agreement. That way you can buy it after you’ve proven to yourself and to the banks that you can be successful.”
8. Look for the best location
Sivia says that finding the right location — that is, an area that works for your niche — is critical. “You can have the best business but if you’re not near the niche you’re trying to serve, it doesn’t matter how good of a deal you got.” So before you even think about leasing, identify your target client. Ask yourself who you’re serving and where they hang out.
9. Make sure that everything that’s supposed to be in the lease agreement is in the agreement
If a landlord makes a verbal promise to incentivize you, make sure that that promise is included in writing in the lease. Terms that are not in the contract aren’t legally binding. “If it’s not in writing then it’s not there,” Sivia says. “You will be stuck with the terms in the contract, whether you like it or not.” This is another reason why it’s so important to have an adviser review and help you negotiate your lease.
Lovett’s Soul Food has learned the difficult truth about commercial leases: Now that the business is operating in the building, it may be too late to enact an agreement. Thankfully, Sivia Law helped them legitimize their tenancy, obtain the proper insurance, and minimize the business’s liability going forward.
Like any major decision, signing a rental contract should be preceded by deliberation. The contract is legally binding, so make sure that you’re satisfied with the agreement. And remember, you don’t have to — and shouldn’t — go it alone. “Always seek out professionals,” Sivia says. “They’re going to have knowledge of the area, they’re going to know how to minimize risks and they’ll help you save time and energy.”