The Office Lease Is Perfect in Every Way Print

Last week, we discussed some of the factors to think about when renting a space for your company's initial office or retail location. Just to review, aside from the age-old adage "location, location, location," other factors to think about include enough parking, anticipated staffing levels, and potential future expansion. I reiterated how critical it was to be detached from the here and now. Find a location that will work for your company in the long run, not simply for the short term.
Signing a business lease is the most crucial step, and we'll go over it this week (insert dramatic music here). Many business owners make the rookie mistake of not reading the contract before signing it when they rent office space. Do not bother to read the small print. The fine print is EVERYTHING in a lease.

Are you not convinced? For the benefit of the naive, I will tell you the real tale of my friend Homer. A commercial office unit was leased to Homer for two years. Signing the lease and agreeing to personally guarantee payment as the business owner, Homer vowed to obey its terms. After Homer moved in, everything continued as normal until the end of the two-year lease term. When Homer finally read the lease, he realized it had been a huge mistake.
When Homer gave his landlord what he believed to be the standard 30-day notice at the conclusion of the two-year lease term, he found out that the lease had automatically renewed for another two-year term at the 60-day notice point. Put another way, Homer failed to note that the lease stipulated a sixty-day notice period to inform the landlord of his intention not to renew the lease. Since Homer was unaware that he needed to provide a minimum of sixty days' notice before he planned to leave, the lease was automatically extended for an additional two years. And Homer could do nothing except scold himself for wasting time not reading the lease; there was no other option.
When Homer said that the landlord should have read the lease before giving the 60-day notice, what did the landlord do? Although the landlord understood Homer's situation, he insisted on honoring the agreement. This meant that Homer would still be responsible for paying rent for another two years regardless of whether he moved out as planned.
Does the landlord's decision to uphold the lease agreement instead of letting Homer off the hook render him a wicked man? Absolutely not. From the landlord's perspective, enforcing the lease restrictions was his only option. His space was rented out for the following two years according to a written contract. The unexpected vacancy of the room was not in his plans. If your rental property is empty, it's the same as running a business without clients. If there is no one renting out the space, there will be no money to cover the mortgage.
Well, "It's just business..." as the old adage goes.
While it's understandable that Homer could have felt awful about not knowing about the auto-renewal agreement, no decent landlord would let their own financial stability be jeopardized by letting Homer's space remain empty. It makes no difference whether Homer read the lease or not. Homer must fulfill his obligation as a tenant since he agreed to the terms of the lease when he signed it.
Homer is currently moving his business to a new location while being unable to get out of his previous lease. He will keep paying rent on the place he is leaving for the next two years, or until he finds someone to sublease it. No matter what happens, Homer will continue be legally liable as the tenant—that is, until his sublessor agrees to a new lease with the landlord. Ideally, he'll find a new tenant and have them pay the rent.
The lesson here is to read the lease, like before. Alternatively, you might ask a lawyer to review it for you. Especially when it concerns money or my firstborn kid, I have learnt the hard way that I should never sign a legal document without first having my attorney analyze it.
Before you sign a business lease, consider these additional factors.
How does one determine the amount due for a lease? To get the monthly payment for a lease, the simplest formula is to multiply the square footage by the price per square foot and then spread the total out over a year.
The yearly lease payment would amount to $12,000 in this case, as the cost per square foot is $12. The monthly leasing payment, when divided by twelve months, comes to $1,000. Rest assured, this is an oversimplified situation. Additional factors that impact the final price of most commercial leases nowadays include rent hikes, operating expense escalations, common area levies, etc.
Where does the money go? Before you pay, make sure you know precisely what you're getting. Aside from rent, are there any other expenses that I should be aware of? Take utility bills as an example; will you have to pay for them yourself? Do things like janitorial services and parking cost money? Exactly who is responsible for fixing things and doing maintenance?
Can we find an escalation clause? Landlords sometimes include an escalation provision in their leases, which enables them to charge renters more for rising building operating expenses. You should request a limit on the maximum amount that the lease payment can increase by within a specific time frame if your lease has such a provision. Also, you have every right to demand an itemized breakdown of the costs that the landlord cites as justification for the rent increase if the escalation clause is ever invoked.
What kinds of rent hikes are possible? Importantly, how much can the landlord increase the rent if you decide to extend the lease? As the value of a property rises, rentals are likely to follow suit. Your landlord has every right to request a rent increase if he is able to rent the space for more than what you agreed upon a year ago. Having your rent double in one night, though, would be a nightmare. Do not sign the lease until you have negotiated the increase. In most cases, percentages, rather than fixed rates, are used to determine rent increases.
Validation and cancellation. You are usually required to provide at least sixty days' notice under most leases in order to end the lease and leave the property. Many leases also automatically renew for another term unless notice is given within 60 days before expiration, as Homer discovered. Be aware of the notice period and when your lease expires.
Must I provide a personal guarantee? If things go wrong with your company and you can't pay the rent, what would happen? Is it then your personal responsibility to pay the rent? Likely yes. An individual guarantee from the company's owner or officer is typically required by landlords. This implies that you will still be personally responsible for the remaining balance of the lease even in the event that your firm goes bankrupt.
Do your best to make everything clear. Make sure you understand every aspect of the lease. In case you are confused, feel free to inquire.
Can you tell me which space you are renting? Repairs whose responsibility are they? Which shared spaces are available to you? The common restrooms need soap, towels, and, most significantly, toilet paper, but no one seems to care about the tiny details.
Something minor to think about now, before you unexpectedly find yourself in a bind without these conveniences.

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