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Commercial Rental Agreement: Don't Sign Anything Until You Read This

Posted by Pekin Insurance on Feb 10, 2016

About to sign your first commercial rental agreement? Stop! First, you need to understand what to expect.  

About to sign your first commercial rental agreement? Stop! First, you need to understand what to expect

Choosing a home for your business is a big decision. Usually, this involves moving into a commercial space and paying rent. It's like an apartment in theory, but very different in practice.

The most important aspect to consider is the commercial rental agreement (a.k.a. the lease).

New business owners need to consider all the variables to these binding contracts. Although you believe the agreement is fair and honest and you've consulted third parties, consider your business goals and responsibilities, too.

But, before we get too far ahead of the game, you need to know what to expect from these contracts.

A commercial rental agreement: what makes it different?

Although residential and commercial leases serve similar purposes, the specifics are very different. Overall, commercial agreements are far stricter and are legally binding. The landlord for your apartment may allow certain breaks in the lease, but your commercial landlord will not. It's strictly business.

Here are a few major distinctions:

  • Negotiation of terms: There is more room to negotiate terms within the lease. Everybody will use the space differently, so landlords are willing to compromise. Businesses often need special permissions and new terms for their needs.  Make sure you're fully prepared to negotiate and get the best deal. 
  • There is no master template: Every commercial rental agreement is different. There is no standard lease to use. Each space requires a customized set of terms and policies, which is one of the reasons it's so important to read the contract thoroughly. 
  • Few consumer protection laws: The rights you have as a residential lessee do not all apply to commercial space. There are fewer laws to protect your privacy and not as many rules on lease terms, such as security deposit caps and entering without permission. 
  • Breaking the lease is tough: Unlike your typical rental lease, these contracts are strict, long-term agreements. It's unlikely that you can sublet the space if you want to move out early. 

Commercial rental agreement: the five terms to scrutinize 

1. What's included in the rent

Similar to the amenities that may be included in your apartment lease, there are quite a few things that may or may not fall under your rent. Either way, be ready to negotiate the projected costs for using the space. Here are the additional things to consider: 

  • Maintenance and repair costs
  • Heating, air conditioning, electricity, etc. 
  • Business insurance (some coverage may be included)
  • Property taxes
  • Escalations (increases in rent over time) 

2. Length of the lease 

Understand when your lease begins and ends. Is there a particular date you need to be moved in by? You may not want a seven-year lease, depending on your business goals. Talk about a length that is mutually beneficial. 

  • Can you renew the lease after the contract is done? 
  • Is subletting allowed if you have to move out early? 
  • Are there penalties for early termination?
  • What notices must be given prior to eviction? 

3. Security deposits

As we mentioned earlier, there are fewer consumer protection laws for commercial agreements; therefore, your landlord may have the power to require a hefty security deposit, depending on the machinery or equipment you use and the amount of risk involved

  • If you think the security deposit is too high, come up with a counteroffer. 
  • Know what procedures will be done before receiving the money back. 

4. Responsibilities for maintenance and repair 

Don't let this part slip by unnoticed. There are quite a few specifics in this section that could catch you off guard after the agreement is signed. Scrutinize what is expected of both parties (landlord and lessee) for maintenance and repair. 

  • Outline every situation you can think of. Be clear about who cleans and repairs certain things. 
  • Add a section about timely responses. Keep your landlord accountable. 
  • Who is responsible for paying for damages? Under what circumstances? 

5. Improvements and modifications 

Do you have the option of making modifications to the space? Can your landlord make changes while you are occupying it? Who will ultimately pay for those changes and own them after the lease is done? 

These are the types of questions you need to ask while going over the commercial rental agreement. Look for loopholes and grey areas, and do your best to define them. 

Your best line of defense: good questions and negotiation 

When it comes to a commercial rental agreement, there are quite a few variables to consider. Since there is no standard contract for landlords to use, make sure you read every section thoroughly. Scrutinize the details with a fine-toothed comb. Finally, be prepared to negotiate the best deal possible. 

If you're seeking general liability or commercial property insurance, we can help. Check out the Pekin PAK program, which includes Lessor's Risk insurance. We offer competitive rates and combined policy packages for our customers, plus preferred rates for qualified commercial property owners. Are you prepared for accidents? Give us a call or request a quote for more information.

What other responsibilities can we add to the list? Share your thoughts and expertise in the comments!

  

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