May 12, 2015 | 4-minute read (710 words)
Guest post contributed by Tricia Meyer, Managing Attorney at Meyer Law.
Making the big leap from your home or co-working space? Need a change of scenery? Moving into your own, brand new office digs? The following are a few things to consider when looking over your new lease.
The length and terms of your lease
Depending on your company’s growth stage, you’re going to want to consider the length of your lease. Many times, with commercial leases, property managers are looking for longer-term commitments. Sometimes these commitments can be as long as 10 years. Your best bet is to look for a lease that is short-term with multiple options to renew.That way, if you outgrow the space, you won’t be stuck with the lease.
If you anticipate significant growth over the next few years, you’ll want to have the ability to terminate your lease, if necessary. It is possible to negotiate a favorable termination clause in advance, such as paying two to three months rent if you break the lease. You may also want to consider an assignment clause, which allows you to assign your lease. Additionally, if you run into a situation where you can no longer afford rent, you may also want the ability to sublet the space. This will allow you to leave the space before the lease has expired. Note, some leases will not allow either assignment or subletting.
It sounds obvious, but think about how the price of rent fits into your overall budget and make sure you’ll be able to afford the cost, considering the length of the lease. You might have to sign a personal guarantee: which means if your business can’t pay rent then you are personally liable. The important thing to remember is that property managers are looking for a track record; if a personal guarantee is a must, you can typically have the guarantee expire after a set number of years (i.e., expires after two years on a five year lease). Also pay attention to yearly rent increases and other obligations you may have as a tenant. Some leases require a base rent plus a percentage of sales. In addition to square foot costs, you may be required to pay for common area maintenance fees. If so, make sure you have a full understanding and negotiate caps on how much those fees can be increased each year.
Obligations and use of space
Your lease will outline the responsibilities of your company and your property manager. You may think that your property manager is responsible for fixing appliances or maintenance upkeep, but that is not always the case with commercial leases. So, it’s important to pay attention to what utilities and other amenities are included or not included in your rent. Review the lease and make sure you are aware of things that may prevent you from using the premises. Does your business depend on foot traffic? If so, you can add provisions in the lease that prevent your property manager from renting space to competitors. Your lease may also include information on how you can advertise your business within the space, with restrictions on signage and other improvements. If you require alterations, make sure you have permission to do so, define what happens when you move out and outline who is responsible to pay for the alterations. If you have a longer lease, the property manager may cover the costs.
Commercial leases are less standardized than residential leases and have many nuances. Make sure you review your lease carefully and negotiate the terms that are important to you to avoid any issues down the line.
Tricia Meyer is Managing Attorney of Meyer Law, a boutique law firm providing top-notch legal services to clients ranging from startups, to mid-sized companies, to large corporations in a variety of industries including technology, telecommunications, financial services, real estate, advertising, marketing, social media and healthcare. Connect with Tricia @Tricia_Meyer.
Do you need help pulling together financials for your startup pitch? Tell us about it in the comments section below or contact Early Growth Financial Services for support with your startup fundraising.