With a Lease, The Devil Is In The Details

In the last article we looked at a few of the things you should consider before leasing that first office or storefront for your business. To recap, you should not only consider the old standard "location, location, location," but also consider things like sufficient parking, the number of employees who will be working onsite, and future growth projections. I stressed that it was important not to get caught up in the moment. You should take your time to find the space best suited for your business for the long haul, not just for today.

This week we'll discuss the most important aspect of the process: signing a commercial lease (insert dramatic music here). One of the biggest mistakes many entrepreneurs make when leasing commercial space is not reading the lease. Forget reading the fine print. When it comes to a lease its ALL fine print.

Don't believe me? Let me tell you the true story of my friend, Homer, whose name I have changed to protect the ignorant. Homer signed a two year lease on a suite of offices for his business. As the owner of the business Homer signed on the dotted line and agreed to personally guarantee payment of the lease and to abide by its terms. Homer moved in and it was business as usual until the end of the two year lease term drew near. It was then that Homer discovered that failing to read the lease was going to be a very costly mistake.

Toward the end of the two year lease period Homer decided to relocate, but when he gave the landlord what he thought was the customary 30 day notice, he discovered that the lease had automatically renewed for another two year term at the 60 day notice point. In other words, Homer didn't realize that the lease required a minimum of 60 days notice to let the landlord know that the lease would not be renewed. Because Homer did not know that he was required to give at least 60 days notice of his intent to vacate, the lease automatically renewed for another two years. And there was not a darn thing Homer could do about it but reach around and slap himself in the back of the head for not taking the time to read the lease.

What was the landlord's position when Homer pointed out that he had not read the lease and therefore was not aware of the 60 day notice? The landlord, while sympathetic to Homer's plight, stuck to his guns and told Homer that he would have to honor the lease, which meant that even if Homer moved out as planned, he was still on the hook for paying the rent for another two years.

Does the fact that the landlord chose to enforce the lease agreement rather than let Homer off the hook make him an evil man? Not at all. From the landlord's point of view, he had no choice but to enforce the terms on the lease. He had a signed contract that told him his space was going to be rented for the next two years. He had not planned on the space suddenly being vacant. Being a landlord with unrented space is like being a business with no paying customers. Empty space means no revenue from rental fees which means no money to pay the mortgage payment. As the old saying goes, "It's just business..."

Sure, any landlord with a heart might feel bad that Homer was ignorant of the auto-renewal clause, but not so bad that they are willing to risk their own financial well-being by having Homer's space sit vacant. The bottom line is this: whether Homer read the lease or not is irrelevant. Homer signed the lease, thereby agreeing to its terms, and therefore he must hold up his end of the bargain, period.

As of this moment, Homer is relocating his business in spite of not being able to get out of his old lease and he will continue paying the payment on the vacated space for the remaining two year term of the lease or until he can sublease the space. Even then Homer is not fully off the hook because he will still be considered the legal tenant unless his sublessor agrees to sign a new lease with the landlord. Hopefully he will just have someone else making the lease payments.

Again, the moral to this story is READ THE LEASE. Or even better, have an attorney read it for you. I have learned over the years to never sign a legal document of any kind without letting my attorney review it, especially if the document involves money and my first born child.

Here are a few other points to ponder before signing a commercial lease.

How is the lease payment calculated? The most basic equation for calculating a lease payment takes the number of square feet times the cost per square foot, then amortizes that over a 12 month span. For example, if you have 1,000 square feet and the cost per square foot is $12, the annual lease payment would be $12,000. Divided by 12 months the monthly lease payment would be $1,000. Again, this is a simplified scenario. These days most commercial leases include additional factors that affect the final price, such as rent increases, operating expense escalations, common area charges, etc.

Who pays for what? It's important that you understand exactly what you are paying for. Are you responsible for any costs other than the rent? Will you be responsible for paying your own utilities, for example? Will you have to pay for parking privileges or janitorial service? Who handles maintenance and repairs?

Is there an escalation clause? It is typical that the lease contain what's known as an escalation clause that allows the landlord to pass on increased building operating expenses to the tenants. If your lease contains such a clause you should ask for a cap on the amount the lease payment may rise over a given period of time. And if the escalation clause is ever activated by the landlord you are well within your rights to ask for an itemized accounting of the expenses that are being considered as cause for your raise in rent.

What rent increases might there be? One very important factor to know is this: if you do renew the lease how much can the landlord go up on the rent? It is expected that rents will increase as property values increase. If your landlord can rent the space for more than you agreed to pay a year ago, he is within his rights to ask for the increase. However, it would be a nightmare if your rent suddenly doubled overnight. Negotiate the increase before you sign the lease. Most rent increases are calculated by percentage, not by flat rates.

Renewals and terminations. Most leases require that you give a minimum of 60 days notice if you intend to terminate the lease and vacate the property. As Homer learned, many leases also renew automatically for another term unless you give notice within 60 days of expiration. Know when your lease expires and the time required to give notice.

Is a personal guarantee required? What happens if your business goes south and can no longer afford to make the lease payment? Are you then responsible for paying the rent out of your own pocket? Probably so. Most landlords insist on a personal guarantee from the owner or an officer of the business. This means that even if you go out of business you are still personally on the hook for the remainder of the lease.

Finally, clarify all points. You should be clear on every point in the lease. And if you are not, ask for clarification. Exactly what space are you leasing? Who is responsible for repairs? What common areas will you have access to? Who is responsible for maintaining the little things, like keeping the shared restrooms stocked with soap, towels, and most importantly, toilet paper.

A small detail to consider now, but not when you suddenly find yourself without such amenities at the wrong time.

Small Business Q&A is written by veteran entrepreneur and syndicated columnist, Tim Knox. Tim's latest books include "Small Business Success Secrets" and "The 30 Day Blueprint For Success!" Related Links: http://www.smallbusinessqa.com http://www.dropshipwholesale.net

---

What Happens When the Anchor Tenant Moves and You Are On a Ten-year Lease?

Recently there was an article in the Houston Business Journal... Read More

Dodging Leasings Grim Reaper: Navigating a Payment Default

In her third Harry Potter novel, ?The Prisoner of Azkaban?,... Read More

How To Choose An Equipment Leasing Company

Leasing has become a preferred form of equipment financing, accounting... Read More

Leases And Tenants - The Spooky Tenant

You, Mr. Landlord are pleased to find qualified tenants for... Read More

Ten Ways to Save a Bundle on Your Next Lease

According to the Equipment Leasing Association ("ELA"), U.S. businesses lease... Read More

So You Want to be a Landlord?

The residual income from owning rental properties may bring more... Read More

Venture Leasing: Startup Financing On the Rise

According to Pricewaterhouse Coopers, investment by institutional venture capitalists in... Read More

Ten Ways Start-ups Use Venture Leases And Loans To Generate Millions

The rise of venture leasing and lending has created an... Read More

What to Consider Before Leasing a Car

Some people choose to lease a car rather than buying... Read More

Getting Your Venture Lease Approved

Each year venture capitalists fund more than 2,500 start-up companies... Read More

Equipment Leasing Blunders That Can Cost Your Firm a Mint

Rod McHenry, the financial vice president of a document imaging... Read More

The Lease And Purchase Option

If you have an investment property, should you rent it... Read More

Lease or Buy? That is Always the Question with Car Financing

Leasing is a perfectly viable and legitimate way to finance... Read More

Lease Contracts - The Meaning of Joint and Several

When you see the phrase "joint and several" in a... Read More

How Venture Leasing Added Millions To A Startups Equity Value

Craig Berman beamed noticeably after completing his board presentation. Berman,... Read More

Increase Your Business Growth and Cash Flow Through Equipment Leasing

"If it can be manufactured, it can be leased." For... Read More

Terms to Know Before Leasing A Vehicle - Leasing Jargon Simplified

So, you've decided that you want to lease that next... Read More

Pricing Your Apartments

How do you fix a price point for an apartment?... Read More

Explore An Effective Revolutionary Approach To Traditional Business Financing

For business owners who need working capital now there is... Read More

Interim Rent: Equipment Leasing?s Trap Door

Many lessees enter into lease transactions that they believe are... Read More

With a Lease, The Devil Is In The Details

In the last article we looked at a few of... Read More

Using Equipment Leasing as a Competitive Weapon

Most great generals know how to design winning battle plans.... Read More

Basic Things You Should Know About A Lease Purchase Contract

What exactly is a contract?By definition, a contract is an... Read More

The Leverage of the Lease

In today's rapidly changing business environment it makes sense to... Read More

True Tenant Tales, Volume One

Working with tenants can be an amazing experience. (Owners and... Read More

Insiders Guide to Snaring the Best Lease Deal

Every year, thousands of business owners and financial managers are... Read More

Ten Equipment Leasing Tips - Save a Bundle on Your Next Lease

According to the Equipment Leasing Association ("ELA"), U.S. businesses lease... Read More

Venture Leasing - A Smarter Way To Build Enterprise Value

In 2003, venture capitalists and investors dispensed over $18 billion... Read More

Smart Car Leasing for Beginners

Car leasing is extremely popular because it provides an attractive... Read More

Warning - This Lease Might Explode Any Minute

Mike Caringi, owner of a small New Jersey business that... Read More

Landlord Tips And Tricks

Every real estate investor dealing in rental homes has done... Read More