Renting Property for Your Business
Most businesses—especially small businesses—rent their premises by means of a lease or rental agreement. This article explains the basics of leasing and includes the main issues to consider before signing a lease.
The owner, or landlord, of the premises issues a legal document that details the terms of the tenancy. A rental agreement is used for tenancy for a short time, such as a month. A lease obligates the landlord and tenant for an extended time, usually a year.
The lease confers the right to occupy the premises for a stated period of time in exchange for the payment of rent, provided that the tenant meets the conditions stated in the lease.
Your attorney should ensure that those conditions serve the purposes of your business and are reasonable.
Your legal rights should be stated in the lease, including right of access from the nearest public highway. The premises must be described accurately in order to avoid disputes, so an accurate plan of the area of the building that you will be renting should be attached to the lease, including the square footage and the right to use common areas. Payment for essential services such as gas, electricity, and water should be pro-rated among the building's tenants if separate metering is not provided. Landlords have rights and obligations under the lease but must give tenants the right of quiet possession, that is, the right to occupy the property without interference.
The term of the tenancy is the length of time the premises will be rented or leased. If the tenant will be able to extend the lease after the initial period, the terms will be stated in the agreement. Even if premises cease to be in use, the tenant will be liable for payment until the lease lapses. Consequently, for a small business, a rental agreement or periodic tenancy (from month to month, or quarter to quarter) may be more appropriate.
On signing a lease, the tenant agrees to certain conditions. These are explained in more detail below.
- Rent
The lease should clearly state the amount of rent and its payment dates. If initial refurbishment or alteration of the premises will be necessary, negotiate a rent-free period at the beginning of the tenancy. A real estate agent, experienced in commercial property, can negotiate on your behalf.
- Repairs
The property should be in a suitable state of repair, but if it is in poor condition, the prospective tenant must prepare a schedule of condition with photographs. The obligation to make repairs during the term of the lease should be stated in the agreement. Repairs due to normal occupancy are often the responsibility of the tenant, while structural or mechanical repairs are the responsibility of the landlord. The property must be left in an acceptable condition. Businesses may be served with a schedule of dilapidation, itemizing repairs that must be carried out.
If the entire premises are leased, the landlord may expect the tenant to take full responsibility for all repairs (including structural). In this case, have an inspection performed and list any defects to be remedied before signing the lease. You may be able to negotiate an upper limit to the contributions made toward the cost of repairs or even an inclusive rent. Small businesses should negotiate an internal repair lease with no liability for structural repairs.
- Insurance
The tenant will be required to pay for insurance, although the landlord may initially make the payment, reclaiming pro rata from the tenant. Make sure that insurance is adequate and that policy terms are reasonable.
- Service charge
This charge applies to a building occupied by more than one tenant. The landlord will usually pay for common costs such as structural repairs, maintenance of the common areas, heating and air conditioning, and provision of a building superintendent or security staff. He will then recharge the tenants, usually based on the floor area they are renting. You should ensure that the basis of calculation is stated, that you have the right to see the actual expenditure, and that you are not paying for any empty areas.
- Usage
Leases usually contain restrictions on the use of the property, including prohibitions of certain uses, such as those that cause noxious fumes and noise. The restrictions normally reflect those imposed by the local zoning board. The lease should contain a clause that permits a change of use subject to the landlord's approval, stating that he or she must act reasonably.
- Assignment and subleasing
The lease agreement should specify whether the tenant is allowed to sublease or assign the lease to another party. Subleasing means that the original tenant is still liable for the rent, whereas assignment transfers all responsibility to the new tenant.
- Option to terminate
A lease may contain an option to terminate before the end of the lease term, known as a break clause. The advantage to a tenant is that, if increased or decreased space is required, it is not necessary to wait until the lease ends. If a property is no longer suitable, but the lease term has not expired, a tenant can approach the landlord to see if he will accept a surrender of the lease that absolves the tenant from all future liability; of course; the landlord may not agree or may require additional payment to do so.
- Alterations to the premises
Most standard leases prohibit the tenant from making alterations to the property without the landlord's consent. Before signing a lease, consider whether alterations may be required and whether a tenant is required to return the property to its original condition at the end of the lease.
- Reviewing the Rent
A lease may make provision for rent increases. Most standard leases only provide for rent to increase, but a tenant may try to make the landlord agree that rent can also be decreased. If the landlord and tenant cannot agree on rent provisions, an independent arbitrator can be brought in, providing that this is a term of the lease.
- A Guarantor?
A landlord may require that a tenant act as a personal guarantor, in which case the tenant will be liable for paying the rent and other costs should his or her business fail. A landlord may request that a third party (for example, an associate company) be obtained to act as guarantor. You may find it difficult to find someone to act on behalf of your business in this capacity. You should avoid leases with this requirement; a returnable deposit may be an alternative.
As a tenant, you can make reasonable demands on your landlord—particularly before signing the lease. Determine the dispute resolution method acceptable to you. Make sure that the lease allows you to terminate the agreement with no penalty if the use of the building is interrupted for reasons outside your control or if the landlord does not fulfill his or her maintenance responsibilities or misrepresents service costs.
Past or nearby tenants may be willing to give you information about the landlord and how he performs his duties. It is your responsibility to ensure that planning permission has been obtained to use the premises for your type of business.
Do not sign lease agreements that seem to favor the landlord; seek professional advice if you are unsure. Avoid committing to a lease that obligates you to make structural repairs, particularly if the property is relatively old or in a state of disrepair. An exception can be made in circumstances in which the tenant commits to such a lease in return for discounted rent or a rent-free period of occupancy.
Portman, Janet and Fred S. Steingold.
Allbusiness.com, "Negotiating the Best Office Lease for Your Business": www.allbusiness.com/operations/facilities-real-estate-office-leasing/1453–1.html
"Negotiating the Best Commercial Lease Terms": www.nolo.com/article.cfm/objectID/54E96F84–0B14–4DBD-BF29F9962FA9E68D/111/228/142/ART