Real Estate 101: Commercial Leases
Oklahoma City is one of the best cities for Start-ups and Small Businesses. While that is wonderful for our community, it may put some entrepreneurs in a difficult spot. Finding Space can be simple enough, especially if you have a seasoned commercial Real Estate Broker on your team, but reading and understanding a Commercial Lease is an entirely different monster. When considering signing a legal document, it is recommended to retain an attorney to insure your interests are reasonable protected. Still, it is smart to have a working understanding of the market lease.
So, you’ve put together a business plan and found the perfect office, store front, or warehouse? After you contact your attorney it would benefit you read through this list. After your signature is on the lease, it's generally too late to make changes.
1. Have I read and understood the entire lease?
Yes, you do need to read it. I know, can be a very long (and face it, not very interesting) document, but this is a legally enforceable document. It’s in your best interest to know what is in it.
Understand the lease terminology. Clarify that the terms mean the same thing to you as it does to your Property Owner. Anyone who is presenting you with a Lease should be able to explain the terms in the document.
Many Property Owners will use a standard lease that has general terms and conditions. You can negotiate otherwise. If you do, make sure those changes are reflected. Even more important, make sure that the standard language and your new language don't contradict each other.
Do not assume they got it right. Everyone makes mistakes now and then. Make sure you check the start date, end date, rent, rent escalation and any other special terms you negotiated. Also, be sure you know what you are obligated to do.
2. Do I have my business structure in place?
If you are signing as a business and not personally, be sure you have filed your Articles of Incorporation for a corporation or Articles of Organization for a limited liability company (LLC) with the Secretary of State before you sign. If you have not registered with the Secretary of State, the document may not be enforceable.
In addition to having a business structure in place, make sure you have documentation that this lease has been approved by your business entity. For example, if you are a corporation you should have a corporate resolution to show that your board has considered this lease and approves it; or if your business structure is an LLC, the members should approve a Memorandum of Authorization to Lease.
3. Do I understand what I will be responsible for?
Depending on the property & lease type there are several things you may be responsible for in addition to paying rent. These types of things can include maintenance, sometimes referred to as CAM (common area maintenance), taxes, insurance, utilities, or Capital Expenditures.
For Example: "Capital Expenditures" when used in a commercial lease typically refer to major expenditures, i.e. roof, foundation, HVAC (heating, ventilation, air conditioning) and other major repairs and any replacements needed.
You may not be responsible for any of those things, but depending on what kind of property you may be responsible for all of them. These are very important (and expensive) things to consider when signing a legally binding document.
4. Is the lease assignable? Can I have a sublessee?
Check to see if the Property Owner has the right to terminate the lease in the event you enter into a lease assignment; that is, for someone else to take on the lease if you sell the business. The contract may not allow assignments at all. If it does allow for assignment understand that the Property Owner will need to approve the assignment and may to re-negotiate the terms with of the lease with the assignee. Even if the Property Owner approves the assignment, you remain obligated under the lease if the new tenant defaults unless you a released from liability by the Property Owner for the rent.
Similar to the assignment of a lease is the common practice of taking on a sublessee. As it sounds, a sublessee is another business that works in your lease space under your lease terms. You pay the lease and the other party pays you a portion of the cost. You will still be fully responsible for all the terms under the lease. Many Property Owners don't allow a sublessee. If you think you might want to take on a sublessee, you'll need to negotiate with the Property Owner before you enter into the lease.
5. Will I need a personal guarantee?
If you can get away with signing a lease with no personal guaranty, you are extremely lucky. Most Property Owners these days will require you personally guarantee the lease.
Make sure you understand what this would mean for you. You would be personally responsible for all the terms of the lease.
6. Am I being realistic?
If your space composes 2-5% of a larger property, the Property Owner will be less likely to negotiate with you than if your space is 25% or more. Your lease may seem incredibly one-sided and burdensome, but those provisions are there to protect you and the property owner.
If you are feeling a little overwhelmed after reading these few tips you should consider hiring an experience commercial real estate attorney to review the document. This is a legally binding document and you should take any precaution you feel necessary to understand it.
LaGree Associates, L.L.C., is a full service commercial real estate company located in Oklahoma City, Oklahoma USA. This site contains company information, agent profiles, Oklahoma City community information and our current real estate listings.