Commercial Lease Agreements - Avoiding Critical Issues
Small business owners spend significant time and money preparing to open and operate their businesses. The tasks are endless, from market research to obtaining necessary equipment to securing inventory. Small business owners must also secure operating facilities, often leading to a commercial lease agreement.
Unfortunately, many startup owners fail to give this aspect of operating a small business the appropriate amount of attention.
Cost and Term Length Only Scratch the Surface of Commercial Leases
Here is how the process typically goes.
The small business owner spends time researching the appropriate real estate. When they find a suitable location and property, they check with the landlord about availability.
Understandably, their next concern is monthly rental costs, due dates, and the length of the lease agreement. If the owner and landlord agree, the landlord presents the business owner with a commercial lease agreement.
That lease agreement, however, contains numerous provisions and legal issues over many single-spaced pages. And here's where problems begin to arise.
Instead of hiring a business lawyer to check the lease, the small business owner quickly reads through and signs the agreement. But here's the catch. They fail to comprehend the hidden terms buried in the commercial lease agreement.
Understanding the Differences Between Residential and Commercial Leases
As a small business owner, your first step is understanding the difference between residential and commercial lease agreements. They serve different purposes and are each subject to a distinct set of laws.
Here are the primary differences:
Legal Protections: Residential tenants enjoy various protections regarding security deposits, eviction notices, and living conditions. Moreover, the Landlord and Tenant Act of 1951 governs residential leases. Commercial tenants, however, have fewer legal protections. The Pennsylvania Commercial Real Estate Broker Lien Act may offer some protections for commercial tenants
Lease Terms: Commercial leases often have longer lease terms. They can range from three to ten years, compared to the typical one-year term in residential leases. This long-term commitment makes understanding and negotiating lease terms even more critical for businesses.
Negotiability: Commercial lease agreements are highly negotiable and complex, unlike residential leases. You can often negotiate lease terms, tailoring them to your needs.
Operating Expenses: With most residential leases, the landlord is responsible for property expenses. Commercial leases often pass a portion or all of these costs to the tenant. So, you could be obligated to pay taxes, insurance, and maintenance fees.
Commercial lease agreements usually have better terms for the landlord, not the tenant.
Understanding Commercial Lease Provisions
Commercial lease agreements also contain provisions that small business owners without legal training may not fully understand. Pennsylvania has specific laws about many of these areas. A business lawyer familiar with those laws and licensed to practice in Pennsylvania can present essential clauses and requirements surrounding each.
These issues can include:
- Confession of judgment
- Standard area maintenance and their calculation
- Responsibility for repairs and improvements
- Legal options for the landlord and tenant with a breach of contract
- Legal requirements of the parties to act upon a breach
- Insurance requirements
- Indemnity and releases
- Subletting and assignment
- Acceleration of rent
Many issues within a commercial lease may not seem important at the outset but could prove costly in the long term.
But that’s why you should have a business attorney review a commercial to identify concerns before you sign. After you sign, applicable laws govern its terms.
Critical Clauses in Commercial Lease Agreements
Commercial leases are complex documents with several critical issues that require careful negotiation and understanding. A business lawyer’s review can safeguard your interests concerning the following elements:
1. Assignment and Sublease Rights
These provisions determine your ability to assign the lease to another business or sublease part of your premises. Negotiating these rights provides flexibility for future growth, downsizing, or business sales without breaching your lease. A business lawyer can identify areas for negotiation to protect your long-term interests.
2. Default and Remedies
It is crucial to understand what constitutes a default and the remedies available to both parties. Default clauses must comply with Pennsylvania contract law, including requirements for notice and opportunity to cure defaults.
A commercial lawyer can negotiate terms that provide grace periods, notice requirements, and reasonable remedies. That can protect your business from harsh penalties for minor breaches.
3. Property Taxes
Commercial lease agreements often pass property tax obligations to the tenant. So, you need to understand tax calculations. You must also establish caps on tax increases and your right to contest assessments.
4. Insurance Requirements
Leases specify the types and amounts of insurance tenants must carry. Those requirements must be reasonable and compliant with Pennsylvania insurance law. They cannot impose excessive or legally impermissible burdens on the tenant.
Legal review ensures these requirements are reasonable and protect both parties without imposing excessive costs on your business.
5. Repairs and Maintenance
Clarifying which party must pay for repairs and maintenance can prevent disputes and unexpected expenses. Negotiations can address the extent of your obligations and ensure they are fair and manageable.
6. Permitted Use
This clause defines how you can use the leased space. You must ensure it fits your business plans and follows zoning laws for flexibility and compliance. Misalignment with zoning laws can lead to legal issues.
7. Rights and Amenities
Access to parking, signage, common areas, and utilities are rights and amenities that may be important to your business. Clarifying these provisions in the commercial lease agreement ensures they meet your operational needs.
8. Dispute Resolution
Leases should include mechanisms for resolving disputes, such as mediation or arbitration. These dispute-resolution mechanisms must comply with state law, including the Pennsylvania Uniform Arbitration Act. Alternative dispute resolution can offer a less expensive and faster alternative to litigation, preserving business relationships and reducing legal costs.
9. Rent and Rent Escalations
Understanding your initial rent, any escalations, and the basis for increases (e.g., fixed, CPI, market rate) is critical. A business attorney can negotiate caps on increases and fair calculation methods.
10. Lease Term and Renewal Options
The renewal and term of the commercial lease affect your business's stability and future planning. You should clearly outline and negotiate options for renewal, conditions for exercising them, and renegotiation of terms.
11. Tenant Improvements
If modifications to the premises are needed, who pays for these improvements? What are the conditions? And what happens at the end of the lease? These are essential considerations.
Negotiations can include allowances, amortization over the lease term, and restoration obligations.
12. Exclusive Use Provisions
These provisions protect your business by preventing the landlord from leasing other spaces within the property to direct competitors. Securing an exclusive use clause can be crucial for retail companies.
The Role of a Business Lawyer in Commercial Lease Agreements
When embarking on the journey of leasing commercial property, small business owners face a myriad of critical decisions. Among these, the decision to sign a lease agreement might seem straightforward. But that decision is fraught with potential legal complexities and ramifications.
Engaging a business lawyer to review your commercial lease agreement is not just prudent; it's essential. An experienced attorney can help:
- Clarify Terms: Ensure you understand every lease aspect, including obligations, restrictions, and liabilities.
- Negotiate Favorable Terms: Leverage legal expertise to negotiate terms that protect your business interests and provide flexibility.
- Avoid Costly Mistakes: Identify potential pitfalls, such as onerous repair clauses or unreasonable rent escalations.
Signing a commercial lease agreement is a significant commitment for any small business owner. A business lawyer can help safeguard your interests and avoid costly pitfalls.
Business Lawyers in Bucks, Delaware, and Montgomery County
Conduct due diligence if you’re considering signing a commercial lease agreement for a business in Philadelphia or the surrounding areas of Bucks, Delaware, Chester, or Montgomery County, PA. Contact our law firm first.
Our experienced business and rea estate lawyers can help you avoid making a costly mistake. In fact, Our firm garnered national recognition for real estate litigation, land use, and zoning law. They will review the lease terms and conditions to ensure they are favorable. They can also assist in negotiating a better deal in certain situations.
Legal review of a commercial lease agreement is another startup cost for a small business. However, the benefits of reviewing the contract before signing are significant. It can prevent headaches in the future, and that’s usually money well spent.
We have law offices in Doylestown, Norristown, and Wayne, PA.
