I am planning to start a new business which I think could be really successful. I need to lease a store and found one in a great town which get’s tons of foot traffic which is exactly what I need. Since this is a new venture for me, I am nervous. What should I know about renting commercial space so that I don’t get myself in any trouble?
First, let me congratulate you on the start of your new business venture. Starting a business is very exciting, but it can also be challenging without proper guidance. I would recommend that you meet with your accountant and attorney before making any decisions about starting a new business – including figuring out from both a legal and financial standpoint should you incorporate your business. It is important to assemble your “team” of professionals to help guide you through each step of starting a new business and certainly before entering into a lease agreement or other obligations. You may also want to consider, if not already, developing a written business plan for the new business. Your business plan will guide you in making decisions about what amount of rent your business could afford, and how long of a lease term you may want to consider for the store.
It sounds basic, but the most important point is to get any lease in writing from the landlord. Most often, you will negotiate the basic lease terms either directly with the landlord or through a broker, without a lawyer’s involvement. You need to make sure the basic lease terms include the amount of rent, lease term, renewal rights, and who pays real estate taxes, utilities, and any other expenses. Once you have the basic lease terms agreed to with the landlord, it is most common for landlord or landlord’s attorney to prepare the written lease. Leases for commercial space can take many forms and most commercial leases in New Jersey can run between 30 to 60 pages. There are shorter leases used by landlords, but you should anticipate these shorter leases to strongly favor landlords. In any event, you will want to have the lease reviewed by your own attorney and you should provide him/her with a copy of any term sheet, letter of intent, or similar written statement of terms of the transaction.
During your negotiations, you will want to fully understand rent. Rent can take many forms depending on the type of space to be rented and whether it is situated in a shopping center, strip mall or freestanding building. Gross rent is uncommon in retail leases, and it places the most risk on landlords. Net-Net-Net rent (NNN Rent) is very common and it places the risk on the tenant. NNN Rent places all payment obligations, in addition to base rent, on the tenant. In retail leases, rent can also be based on a percentage of gross sales. Understanding what your rent will be and what is or is not included in rent will be very important to the success of your new business.
Another area to pay attention to during negotiations is the lease term. How long will the initial lease term be for? Most start up businesses will try to negotiate a 3 to 5 year initial lease term. You will also want to consider asking for a right to renew the lease term if the business location is successful and the business is doing well. Conversely, you may want to ask the landlord for an early termination right just in case the business is struggling.
Some other important areas to discuss during negotiations include:
- What use of the premises will be permitted? Express clearly what is permitted and what is prohibited, and examine exclusive use rights.
- What alterations do you need to do to the premises for your use, and will the alterations be done by you or the landlord?
- Will there be any expenses shared in common with other tenants and, if so, what are they and how are they calculated?
- What maintenance and repair obligations will you be responsible for and who is responsible for the general maintenance of the common parking area and sidewalks?
- What happens if you decide to sell the business? Can the lease be assigned to the new owner? Can you sublet all or a portion of the premises?
- Should the business be a corporation or limited liability company, and, if so, will you have to personally guarantee all of the obligations in the lease?
As you can see by now, there are just too many areas to cover in this Patch blog, and that is why I previously recommended speaking with your professionals. As a start-up business, you need to be concerned with many areas that can get you in trouble, but part of being a business owner is managing risk. Having a team of professionals to help guide you to understand the risks will allow you to make informed decisions to avoid trouble later on and to be successful in business.