Why You Should Have an Attorney Assist You with Your Commercial Lease

By: Michael Safren, Esq.

As a small business owner, leasing space for your business in one of the most important decisions that you face.  The rent is one of the largest fixed business expenses, involves complex long-term obligations running over the course of many years, and may subject the business owner to personal liability for any unmet rental obligations. Given the importance, complexity, and significant risks involved in signing a commercial lease agreement, you should have an attorney assist you with your commercial lease.

When entering into a commercial lease agreement, a business owner should be aware that there are few statutory protections available to the business, as a tenant. Unlike, residential tenants who have numerous statutory protections including limitations on a landlord’s ability to raise rent without advance notice, limitations on security deposits, requirements upon the landlord to maintain and promptly repair the rental property, limitations on the landlord’s ability to preference tenant income sources, just cause eviction requirements, and a right for indigent tenants to access free legal assistance, commercial tenants’ only legal protection is from construction eviction by the landlord.  Any other protections must be negotiated and specified within the lease agreement itself. 

Further, unlike residential evictions where tenants have longer notice periods in the event of a claimed breach of the lease agreement, commercial tenants have extremely short time frames before a landlord served notice can require that the commercial tenant vacate the premises.  For example, in a residential lease in the event of non-payment of rent, a tenant has 14 days to either pay or vacate, whereas a commercial tenant only has 3 days to pay the unpaid rent or vacate.   

With such few legal protections available to commercial tenants and such short time frames for receiving and responding to notices, a business owner would be wise to seek the counsel of an attorney to help them understand the contractual provisions of the commercial lease.

Additionally, commercial lease agreements can be quite complex. Increasingly, commercial leases apportion the responsibility for the operating costs including repairs, maintenance, taxes, and insurance upon their commercial tenants.   Discerning where a tenant’s responsibilities for maintenance and repairs ends and the landlord’s responsibility for making capital improvements to the building’s structure begins can be challenging and often contentious.  Moreover, computing the costs for your business’s share of the operating costs can also lead to conflict with the landlord as questions arise about both the propriety and accuracy of the operational charges and their proration. 

Beyond the challenges of the operating costs, commercial leases may often have complicated terms for rent, tenant improvements, lease commencement, and technical defaults.  Often these components of the lease agreement will create new tenant expenses or responsibilities automatically upon the occurrence of an event.  For example, many commercial leases will have hold-over provisions that automatically increase the cost of the base rent by 150% should the tenant fail to vacate the premises at the end of the lease term.  Often commercial lease agreements will establish technical defaults, imposing obligations on tenants to pay other creditors timely and remain solvent and a failure to do so would constitute a breach of the terms of the lease. 

Because commercial lease agreements contain complex provisions that affect the business’s financial and legal obligations and duties to the landlord, a business owner would be well served to seek legal counsel before entering or renewing a commercial lease.

Moreover, the financial risks in a commercial lease agreement are significant. Practically, most commercial lease agreements involve lengthy terms. It is common to see a commercial lease run for a term of 7 year or more.  Tenants often bear the costs not just of the base rent, but the operational costs and maintenance costs.  Should a commercial tenant breach the lease agreement, they could be responsible to the landlord for the rental costs for the remaining term of the lease or until a new tenant can be secured, which can in some cases take years. 

Beyond the rental costs, most commercial leases will have provisions imposing the prevailing party’s reasonable attorney fees and costs upon the non-prevailing party.  Simply put, if a tenant breaches the lease agreement, not only could they be responsible to pay the landlord damages for unpaid rent or damage to the property, but the tenant could be forced to bear the costs of the landlord’s attorney. 

Lastly, many commercial leases require that the business owner sign a personal guarantee that make the business owner personally liable for the business’s obligations under the lease agreement should the business be unable to pay.  For example, should a business fail to pay rent, the landlord could sue and hold the business owner personally liable for the unpaid rent and other economic damages.  In conjunction with an attorney fees provision, a personal guarantee can result in a business owner bearing personal responsibility for tens or hundreds of thousands of dollars in contractual damages and attorney fees to the landlord. 

With such few legal protections, complex contractual provisions, and considerable financial risks including attorney fees, that can become the business owner’s personal obligation, business owners should consult with an experienced attorney before entering into a commercial lease, renewing a lease, or negotiating lease terms.

Running a small business is challenging. The Law Offices of Jenny Ling, PLLC is experienced in helping businesses navigate through the complex challenges of commercial leases and lease agreements.  Contact our office to get further information about setting up an appointment to review, analyze, or negotiate, your commercial lease or if you need legal assistance. 

Michael Safren is a Partner at The Law Offices of Jenny Ling, PLLC.  His practice focuses on business, real estate, civil litigation and probate.