Making Your Lease the Least of Your Problems
You've finally found it, the perfect place to set up shop and open your business. As visions of dollar signs dance in your head, you can hardly wait to get the paperwork over with and sign on the dotted line. Ready to take the plunge, right? Not so fast. From being required to pay for unexpected expenses to landlords seizing inventory for non-payment of rent, commercial leases can cause unforeseen headaches for business owners.
Before you rush to sign on the dotted line, take time before signing to make sure you are aware of these common frustrations with commercial leases.
Practical Considerations for Your Business
Every business has different needs in serving customers. Some businesses rely heavily on foot traffic and need to be in highly populated areas. Others need ample parking lot space to make sure customers can stop in. Regardless of what your business requires, you need to make sure that your commercial lease will meet the needs of your business. Compare prices in the neighborhood you want to be located in. Are you paying a fair price for your store front? Could you be located in a similar space nearby for cheaper? What does the area look like after dark? Are there other store owners who lease from the same landlord you can speak with? What does the parking lot look like during the day? What about at night? What, if any, foot traffic comes through the area? These practical considerations can make a big difference in whether your commercial lease is a good fit for your business.
Don't be afraid to take your time and do your homework before signing a lease. Be wary of anyone who tries to pressure you into signing something on the spot before you have had a chance to do your own research.
Beware the Boilerplate
Many landlords use "standard" template leases that they "use for everything." Be careful when presented with a boilerplate contract that is not tailored to your situation. If there is something different that you and your landlord agreed on, make sure the change is documented in the lease. For example, if your landlord said that she will repair certain fixtures before you move in, make sure that promise becomes a part of your contract. Have both parties initial beside any changes made to signify that both parties agreed to them.
Carefully read each part of your commercial lease before you sign it to best anticipate future costs you may incur. Many contracts provide HVAC (heating, ventilation and air conditioning) equipment for the storefront but require the tenant to pay to repair it if something goes wrong. Are you prepared to pay to repair or replace an expensive HVAC system? Beyond the comfort of your customers and employees, sometimes a product or merchandise needs to be kept at a specific temperature to avoid spoilage. Consider the unique risks of your business when entering into a lease agreement.
Other parts of commercial leases that catch business owners by surprise are things like who is required to pay for snow removal or trash removal (landlord or tenant) or whether posted signs on the marquee are included with the lease or an additional cost. Some leases may require you to carry a certain type or amount of business insurance, too. Lastly, some leases increase rent owed as the business makes more money. That is, if you make over a certain amount, you might be required to remit a certain percentage of that money to the landlord.
Make sure you have the full picture of what your lease is going to cost each month before you sign!
Commercial leases generally last longer than residential leases. Many commercial leases have a three-to-five-year term with the ability to renew afterward. Given the rate at which new businesses fail in their first two years of operating, lease duration can impact how much money you lose if the business does not succeed. Try to negotiate a shorter lease term with the option to renew to reduce your risk. Even if it means paying a higher cost for the property each month, it might be worth it to not be obligated for additional rent payments over a longer duration of time.
Landlord Liens and Contractual Liens
Make sure you clearly understand what will happen if you do not pay your rent on time. Is there a lien built in to your contract? Can the landlord seize your inventory if you do not pay? In addition to contractual remedies, business owners should be aware that landlords can and do enforce their rights using the statutory landlord’s lien available under Iowa Code Chapter 570. Even if your lease does not have a provision allowing for a landlord to seize your inventory, a landlord may be able to do so under this Iowa Code Chapter. If this happens, you should speak with a lawyer right away. There may be protections you can assert.
Speak with an Attorney
Because of these potential pitfalls, it is a great idea to speak with an attorney before signing a commercial lease. An attorney can provide insight on complex legal language and may be able to help you negotiate more favorable terms. Speaking with an attorney can help you better understand the rights, responsibilities, and possible risks that come with your lease.
Iowa Legal Aid provides help to low-income Iowans.
To apply for help from Iowa Legal Aid:
- Call 800-532-1275.
- Iowans age 60 and over, call 800-992-8161.
- Apply online at iowalegalaid.org
If Iowa Legal Aid cannot help, look for an attorney on “Find A Lawyer” on the Iowa State Bar Association website iowabar.org. A private attorney there can talk with you for a fee of $25 for 30 minutes of legal advice.
As you read this information, remember this article is not a substitute for legal advice.