Commercial leasing

Dear Mary, I’m starting a new business and need to rent retail space. What do I need to know?

Renting a commercial space is much different than renting a residential space.

The most important part of renting a commercial space is, of course, the lease. The lease is a contract between the landlord and the tenant, governing the rights and obligations of the parties during the term of the lease.

It is crucial for tenants to negotiate favorable leases. Burdensome provisions that you think you can “live with” may result in the end of your business.

Landlords typically produce the initial draft of the lease, although either party may do so. In this kind of economy, tenants have a bit of a negotiating advantage because most landlords are willing to be flexible to get someone in their space.

The lease should be very clear about rent. What is the minimum rent and when will it commence? Will it be adjusted during the term of the lease? Will you have to pay “percentage” rent, and if so, will it be based on gross sales?

How will the lease define gross sales and the allowable deductions from gross sales? Is there a security deposit, and if so, how much will it be? Will you have to pay any property taxes and if so, how will they be computed? You should learn and understand the differences between (single) net, double net, triple net, and all the possible variations.

Different commercial space options, such as freestanding buildings, multi-tenant buildings, and retail spaces in shopping centers each present their own challenges. These issues may include co-tenancy provisions, parking rights, signage rights, allocating property taxes, and common area maintenance.

You should require that the indemnity clause exclude liability resulting from the negligence or willful misconduct of the landlord and its agents, and also provides indemnity for bodily injury and property damage caused by the landlord.

You should also require that the landlord be financially responsible for the maintenance of the structural elements of the premises. Try to avoid being financially responsible for equipment or improvements that will primarily benefit the next tenant.

If the space has common areas, make sure that your share of the costs is proportionate. A good method is to base the cost on the ratio of the floor area of your premises to the floor area of all of the constructed premises.

If things go sideways, make sure that the landlord is required to give you written notice of an aggrieved breach of the lease, as well as a sufficient opportunity to cure the breach before it’s considered a default.

Make sure that the provision concerning the use of the premises is flexible, so that you can adapt your business to the market. If you’re planning a taquería but run into problems, can you change to a diner?

If your business fails, how can you limit your liability under the lease? Provide yourself with a smart exit strategy now by negotiating the term of the lease and assignment/subletting provisions.

Other pertinent provisions of the lease may address the right of the landlord to relocate the premises, expansion options, renewal options, maintenance, alterations, utilities, insurance requirements, appurtenant rights, and termination rights.

If a lender is involved, make sure you draft the lease to also satisfy the lender.

If you will need to improve the premises, have a contractor and/or architect review the lease. Provisions that involve construction, plans, and installation of fixtures may create deadlines that a contractor or architect might find unreasonable.

I also recommend consulting with a qualified, experienced real estate broker. They may be able to offer information or services that can help. And of course, always have your attorney review any lease before you sign.

Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached at mary@hudsonluros.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.