In the last article, we talked about some of the things you should think about before renting your business's first office or storefront. To sum up, you should think about more than just the old saying "location, location, location." You should also think about things like parking, the number of employees who will be working there, and how the business is expected to grow in the future. I told them that they shouldn't let themselves get caught up in the moment. You should take your time to find the best space...
In the last article, we talked about some of the things you should think about before renting your business's first office or storefront. To sum up, you should think about more than just the old saying "location, location, location." You should also think about things like parking, the number of employees who will be working there, and how the business is expected to grow in the future. I told them that they shouldn't let themselves get caught up in the moment. You should take your time to find the best space for your business, not just for today, but for the long term.
This week, we'll talk about the most important step: signing a commercial lease (insert dramatic music here). When renting a business space, not reading the lease is one of the biggest mistakes that many business owners make. Don't bother reading the small print. There is a lot of small print in a lease.
Don't believe me? Let me tell you the real story of my friend Homer, whose name I've changed to protect the uninformed. Homer leased an office suite for his business for two years. As the owner of the business, Homer put his name on the paper and agreed to pay the rent and follow the terms of the lease. Homer moved in, and everything went back to normal until the end of the two-year lease. Then Homer found out that his mistake of not reading the lease was going to cost him a lot of money.
Homer decided to move near the end of his two-year lease, but when he gave the landlord what he thought was the normal 30-day notice, he found out that the lease had automatically been extended for another two years at the 60-day notice point. In other words, Homer didn't know that the lease said he had to give the landlord at least 60 days' notice if he didn't want to renew it. Homer didn't know that he had to give at least 60 days' notice if he wanted to move out, so the lease was automatically extended for two more years. Homer couldn't do anything about it except reach around and smack himself on the back of the head for not reading the lease.
What did the landlord say when Homer said he hadn't read the lease and didn't know about the 60-day notice because of that? Even though the landlord felt bad for Homer, he stuck to his guns and told him that he had to honour the lease. This meant that even if Homer moved out as planned, he would still have to pay rent for the next two years.
Does the fact that Homer's landlord stuck to the lease instead of letting him off the hook make him a bad person? In no way. From the landlord's point of view, he had no choice but to enforce the terms of the lease. He had a written agreement that said his space would be rented for the next two years. He hadn't planned for the space to be empty all of a sudden. Being a landlord with empty rooms is like running a business with no customers who pay you money. If there is no one renting out the space, there is no money to pay the mortgage. "It's just business," as the old adage goes.
Any landlord with a heart might feel bad that Homer didn't know about the auto-renewal clause, but not so bad that they are willing to risk their own financial security by letting Homer's space sit empty. The bottom line is that it doesn't matter if Homer read the lease or not. Homer signed the lease, which means he agreed to its terms, so he must do what he said he would do.
Homer is moving his business even though he can't get out of his old lease. He will keep paying the rent on the old space for the next two years or until he can sublease it. Even then, Homer is still the legal tenant unless his subtenant agrees to sign a new lease with the landlord. He should just have someone else pay the rent, if all else fails.
Again, the lesson of this story is that you should READ THE LEASE. Better yet, have a lawyer read it for you. Over the years, I've learned that I should never sign a legal document without first having my lawyer look it over, especially if it involves money or my first-born child.
Before you sign a commercial lease, here are a few more things to think about.
How do you figure out the rent? The simplest way to figure out a lease payment is to multiply the number of square feet by the price per square foot. This number is then spread out over a year. For example, if the cost per square foot is $12 and you have 1,000 square feet, your annual lease payment would be $12,000. If you divide $12,000 by 12 months, you get $1,000 as the rent payment each month. Again, this is a simplified version of what could happen. Most commercial leases today have things like rent increases, rising operating costs, common area charges, etc. that change the final price.
What gets paid for? It's important to know exactly what you're paying for. Do you have to pay for anything else besides the rent? Will you be in charge of paying your own bills, like for utilities? Will you have to pay for the right to park or for cleaning? Who takes care of repairs and maintenance?
Is there a clause that says things will get worse? Usually, a lease will have something called a "escalation clause" that lets the landlord pass on any increases in operating costs to the tenants. If your lease has this kind of clause, you should ask for a limit on how much the rent can go up over a certain amount of time. And if the landlord ever uses the escalation clause, you have every right to ask for a detailed list of the costs that are being used to justify the rent increase.
What kinds of rent hikes could there be? One very important thing to know is how much the rent can go up if you decide to renew the lease. As property values rise, rents are likely to rise as well. If your landlord can rent the space for more than what you agreed to pay a year ago, he has every right to ask you for the extra money. But it would be a nightmare if your rent doubled all of a sudden. Before you sign the lease, talk about the increase. Most rent increases are figured out by adding a certain percentage to the old rent.
Renewals and end of contracts. Most leases say that you have to give at least 60 days' notice if you want to end the lease and move out. Homer found out that many leases automatically renew for another term if you don't give notice 60 days before the end of the lease. Find out when your lease is up and how long you have to give notice.
Do you need a personal guarantee? What happens if your business fails and you can't make the lease payment anymore? Then you have to pay the rent out of your own money, right? Most likely. Most landlords want the owner or an officer of the business to sign a personal guarantee. This means that you are still responsible for the rest of the lease even if your business goes out of business.
Last, make sure everything is clear. Every part of the lease should be clear to you. If you aren't sure, ask for more information. What kind of space are you renting? Who is in charge of fixing things? What public spaces will you be able to use? Who is in charge of little things like making sure the shared bathrooms have soap, towels, and, most importantly, toilet paper?
A small thing to think about now, but a big deal if you suddenly don't have these things when you need them.
