dFor most small-business owners, the most complex and expensive legal arrangement they enter into is the lease for their business premises. The purpose here is to highlight some of the standard provisions of a typical business lease.
One of the most common initial misperceptions is that the liability under the lease is on a month-to-month basis. In other words, the tenant is liable only for the rent for each month it occupies the premises. However, the tenant’s liability is for the entire term of the lease subject to the landlord’s having to mitigate its damages by trying to relet the premises.
The next major financial item to understand is whether a lease is “gross” or “net.” Typically, a “gross lease” means that the stated monthly rent will cover all tenant’s financial obligations under the lease. Specifically, this means the landlord is then responsible for all other costs associated with the premises including insurance, taxes and utilities. Under a “net lease,” the rent is not inclusive of such additional expenses. These are the tenant’s responsibility.
Sometimes these additional expenses are referred to as “additional rent” or “triple nets.” If the premises is not a stand-alone building, the tenant’s liability is pro rata based on the tenant’s square footage related to the building’s overall square footage.
Another financial consideration that should be dealt with in the lease is whether there are common areas (i.e., areas outside the leased premises) that are used by the public and the tenant on a non-exclusive basis. Many times the cost of maintaining and repairing these common areas, such as foyers, parking lots, landscaping and sidewalks, are an additional cost added to the expenses to be paid by the tenant. This includes, for example, repaving a parking lot, janitorial service, snow removal and the like.
Another important item that the lease should address is who is responsible to maintain the premises. Typically, a landlord is responsible for structural items such as walls and foundation. The tenant is typically responsible for interior maintenance and repair of the premises. Tenants should be careful to determine who is required to replace the roof. The tenant should have some idea of the roof’s condition at the time of the lease, otherwise the tenant may be responsible for replacement.
One more item of concern is maintenance and repair of the heating and cooling system, i.e., the HVAC. The tenant should be clear as to who is responsible for the HVAC. Even if it is landlord’s responsibility, it is standard for the tenant to have to enter into a HVAC maintenance agreement.
Another possible hidden financial liability is who will complete any tenant improvements or build-outs of the premises, if necessary. The lease should be very clear about such responsibility.
Typically, a landlord will allow the tenant a certain per-square-footage allowance to complete tenant improvements and tenant will complete those with its contractor, subject to landlord’s approval of such contractor. Remember, such allowance will be factored into the tenant’s base rent.
An important provision is whether or not the tenant can sublet or assign the lease to another tenant. Typically a tenant cannot sublet or assign the lease without landlord’s consent. However, the tenant will want to make sure the landlord’s consent is “reasonable.” Reasonable consent means that any new tenant would use the premises for the same or a similar purpose and be as financially capable as the tenant to meet the rent obligations.
Finally, the most important document in any business lease is the personal guaranty. Typically, a small-business owner will not be able to obtain lease space without a personal guaranty, even if the business is operating as an entity.
If at all possible, a business owner should exclude his or her spouse from signing the personal guaranty. Also, a tenant can ask for a limitation on the personal guaranty.
For example, a tenant can ask that the personal guaranty is only for the first two or three years of the lease or is limited to a specific dollar amount.
In summary, the financial obligations under a business lease are substantial and do not simply include the monthly rent. These additional expenses should be included in any business plan of the small-business owner.
John M. Stinar is an attorney with Stinar & Zendejas LLC, a full-service business and estate planning firm. Find more information at www.coloradolawgroup.com or call 719-635-4200.