Most small businesses reach a point where they have to move out of the founder’s basement, garage, or dining room, and lease appropriate space, whether it be offices, a storefront, a warehouse, or manufacturing. A Lease is a significant financial investment. Be sure you understand your Lease, what your financial obligations are, and what will happen if you breach the Lease.
If you are starting a business, or expanding into a new area, make sure that you do not over-extend yourself. Try to negotiate a short-term lease, for instance, one or two years. This will allow you sufficient time to grow your business, but if for some reason you need to move or close down, this will limit your financial exposure. New ventures are uncertain. You can include an option to renew after the initial term. Indeed, a Landlord may be more likely to give you a shorter initial term if there is a viable option to renew. A Landlord frequently will require a personal guarantee for a new business, and if your business fails, you do not want to be personally obligated to pay the balance of the initial term for any longer than you have to.
Research the area. See how the property is maintained. Is the grass cut and the snow plowed? Are the exterior and public spaces well maintained? Are there five other pizzerias within a mile? Perhaps buying or starting a Pizzeria in that spot isn’t such a great idea. Is there sufficient traffic going past your front door? Maybe you can find a spot with synergy with another tenant. A liquor store might do well if there are a number of BYO restaurants nearby.
Research the property. There may be a tradeoff between securing a more desirable location and negotiating a shorter initial term, but make sure your customers can find you easily, get to your parking let easily, and that you have sufficient parking. If you are going to have disabled or handicapped patrons, make sure there is appropriate access. While it is less common, make sure there are no environmental issues that you might be obligated to remediate down the road. New Jersey law might make you obligated to clean up contaminated property if you are a tenant, even if you were not responsible for causing the problem in the first place.
Will you be required to maintain the property? Some Leases include provisions that the Landlord maintains the property and undertakes maintenance and repairs. Other Leases require the Tenant to assume those costs. Make sure you know the condition of the property before you agree to fix it! Perhaps you will need a walk-through or a property inspection.
Perhaps most important, CONSULT AN ATTORNEY TO REVIEW THE LEASE AGREEMENT! It is surprising how many businesses will enter into a long-term lease with little or no understanding of the terms of the Lease, or of the consequences of a default. We can help you understand the “small print” in the Lease, and can try to negotiate more favorable terms:
- Will you have to sign a personal guarantee?
- What is the “actual” rent? Does the Lease charge a base rent plus “Common Area Maintenance” charges (CAM)? These charges include utilities, maintenance and janitorial services, pro-rata shares of property taxes, insurance, and other costs that can significantly affect the overall monthly rent.
- Is there an exclusivity clause in the lease that prevents the landlord from leasing other spaces on the property to your competitors? These provisions can have a significant impact on the health of your business.
- Is there an option to sublet or assign the Lease to another person or entity? These provisions may allow you to lease the space to another business, or to sell the business and have the purchaser assume the remainder of the Lease; and may provide you with an alternative to default should your business struggle.
Consider what will happen under the “worst-case” scenario. If you are unable to pay rent, what are the consequences? Will you remain personally responsible? Can you sell or assign the Lease? Will you remain obligated even after the business vacates the space? Will you have to pay attorney’s fees and costs? It is important to understand the default process as outlined in your lease.
The Professionals at Sapiro Gottlieb & Kroll are intimately familiar with negotiating commercial Leases. Pick our brain and utilize our expertise to ensure that you negotiate the most favorable terms possible, and enhance the viability of your new venture.
Written by Larry Kroll, Attorney At Law, March 2019