Commercial leases are vastly different from residential leases. The former tends to mystify even the most astute business professional. Accordingly, we should touch on a few topics to make the leasing process more understandable and less daunting.
Letters of Intent
We encourage all future tenants to craft a letter of intent with the prospective landlord as soon as you pick the location of your choice – BEFORE signing a lease. This allows you to outline the general lease terms in a concise non-binding document and helps make sure that both you and the landlord are in basic agreement before the final lease is drafted. A letter of intent essentially saves time and money because many general issues can be discovered and addressed quickly using this ‘rough draft’ approach. Topics often covered in a letter of intent include: the amounts rents and security deposits, the proposed date of occupancy and length of the office lease.
Suggestion: The letter of intent should clearly state that it is to be regarded by both parties as non-binding and is only to be considered a starting point for negotiations. If this is not clearly stated, the letter of intent could be deemed a legal and binding contract.
As stated earlier, rent calculations related to a commercial building is much different than rent on in a residential setting. Commercial rents are typically comprised of several additional components, each having its own distinct calculations. First, we have the “base rent” which remains the same every month. However, there are usually other fees, which represent additions to this ‘Base Rent’. These may include utilities, landscaping services, and property taxes. Most landlords will ‘pass through’ these costs on to the tenant as being expenses associated with operating the building. Another name for these additional ‘pass through’ charges is common area maintenance costs (CAM). These charges are assessed based upon the square footage that the tenant occupies.
This additional rent charged can be allocated and charged to tenant in several of the following ways.
- It could be a flat monthly additional fee,
- determined based on a calculation of actual expenses compared to expected expenses or
- be based only upon an increase in these CAM costs over the prior year of building operations.
Things to Keep in Mind
First and foremost, you must make certain that your lease works well for your business and its operations. Secondly, you will benefit from a location close to your home and your clients. The reality is that your clients prefer convenience and we all dislike long commutes.
Periodically, review your lease to ensure that its terms are acceptable to you focusing on the amount of the security deposit, subletting rules, lease assignment, permitted operation hours, parking, deliveries, security, and cleaning services. The importance of addressing these and other issues with the landlord as soon as possible cannot be overstated. As much as possible, make sure that these points are clearly stated in the lease that you finally sign to avoid any confusion in the future. Remember, if a situation arises and there is confusion surrounding it, the wording in the lease you sign will likely govern the outcome. This can be the source of unnecessary expenditures on your part- not to mention sleepless nights.
We recommend that if there is construction to be done to your space prior to and during your occupancy, it be done by your landlord. Additionally, all drawings and renderings should be performed an architect and approved by all the parties prior beginning any work to your office space. Although it may result in a slight increase in monthly rents, a great deal of your stress will be alleviated by requiring the landlord to tackle build-outs. Trust us, you do not want to be embroiled in the minutia of the construction process while you are running your business. From our experience – Its simply not worth it.
Commercial leases typically require tenants to secure insurance coverage or to hold the landlord harmless if certain events occur. You are well advised to speak with your insurance professional to ensure that you are adequately protected against risk of loss and that the amounts required by your landlord are both reasonable and adequate.
Landlords may request that you provide a personal guarantee in order to secure your lease. The accepted practice is not to provide a personal guarantee. By doing so, you may be assuming personal responsibility (and resulting risk of loss) for the payment of the rents and other related costs. This said, providing a personal guarantee may be the only way in which the landlord will be willing to lease you a portion of their property.
In summary. you never want to sign a lease or enter into any agreement unless you clearly understand every aspect of the document you are signing. It is always best to consult an attorney to make sure you are adequately protected.
Once you sign a lease YOU are bound by its terms!
We have a Texas-licensed attorney in our group with 30 years of experience.
He can review your lease and make recommendations to you at no additional charge.
Call 210-601-4642 to schedule your FREE consultation on Zoom!