Before signing any commercial lease or paperwork, you need to be aware of some important factors. Pay attention to the lease and ensure that everything is crystal clear before you sign it. Often, people will just sign upon first glance without really understanding what they are agreeing to. As you can imagine, this can have terrible consequences.
You need to be aware of different aspects of a commercial lease to avoid similar pitfalls. In this short guide, we have identified a few things you should consider when signing a commercial lease.
Aspects to Keep in Mind When Signing a Commercial Lease
You may have agreed on the price and the lease term, and now you are reading the details of the contract. Many people don’t put much focus on these terms, which can backfire.
1. Repairs and Maintenance
The landlord is responsible for any structural changes such as walls, roofs, and the foundation of the premise. On the other side, the tenant is responsible for ordinary repairs and operational costs. They also cover the cost of repairs for regular use items such as switches and issues caused by a tenant’s negligence.
Make sure that the repair expenditures are mentioned in the lease. Often, the landlords will try to include heating and cooling system repair cost on the tenants, so you should watch out for that too.
2. Beware of Annual Escalation
Almost all commercial leases contain an escalation clause, which allows the landlord to raise your rent over time. The amount should be decided before you sign the lease. Not doing so can result in a high annual rise in rent according to the landlord’s terms.
It can result in high costs, especially if you sign a long-term lease. In some cases, the price may go up automatically, so you will have to watch out for those terms. There are different types of escalation that you may find in the lease, which include:
- Fixed Escalations: These fixed terms determine how high your rent will go every year. An example could be an $80 annual rise in rent.
- Percentage Escalations: Another type of escalation may occur as a percentage. The price goes up annually concerning the pre-determined percentage decided on the lease. For instance, it may be a 5% annual rise in rent after a year.
- Consumer Price Index (CPI) Escalations: Some of the leases are tied to the CPI, which is a rise with context to the annual inflation in the country. For example, if the inflation rate is 8%, the rent will ultimately increase by 8%.
3. Breaking the Lease Early
People often have reasons to break an agreement early but often face financial consequences in order to do so. Make sure the charges of breaking a lease early are specified in the lease contract. Often, a landlord will include a huge sum, and you will have no other choice but to pay it.
Some contracts specify that even if a tenant leaves the property early, they would still have to pay the rent for the remaining months. The early breaking of the contract can also negatively impact your credit score, which may hinder your chances to rent a commercial property in the future.
Commercial leases are stricter than housing leases, and ultimately, you can expect legal action if you break the lease early. Make sure you come on the doable terms—for instance, a two-month rent penalty on the early breaking of the contract.
4. Personal Liability
One of the most important things to be aware of when signing a commercial lease is if you are personally liable for the lease or not. For instance, if you own an LLC and the lease is in the LLC’s name only, a failure of the LLC may result in the lease being terminated and you personally off the hook. While Landlords may still be able to come after you in this event, many Landlords will require that you personally guarantee the lease. That means that even if your LLC fails, the Landlord has the legal ability to sue you personally to satisfy the lease obligations.
It is essential to go through the lease thoroughly before signing it. It will help you keep peace of mind, but it will also save you from additional costs and headaches down the road. When in doubt, get a savvy friend to read it over. Or better yet, hire a real estate attorney to read over the lease and help you understand the important points. A cliché that holds true when it comes to leasing, “An ounce of prevention is worth a pound of cure.”