In the hustle and bustle of setting up a business in New York City, navigating commercial leases can be a daunting task for small and medium-sized businesses (“SMBs”). While the location and price are often the primary considerations, it’s crucial not to overlook some of the less apparent but equally vital lease provisions. Here are ten key issues to be aware of when entering into a commercial lease:
- Waiver of Litigation Rights: Some leases may contain clauses that limit the commercial tenant’s ability to litigate disputes. This could include arbitration provisions, limits on types of damages that can be sought, or outright waivers of certain claims. Review these clauses carefully to ensure you understand and are comfortable with any limitations on your rights.
- Force Majeure and Business Interruptions: The Covid-19 pandemic underscored the importance of having robust force majeure clauses in leases. A force majeure clause provides relief from performance under certain uncontrollable events, such as a pandemic. Ensure that this clause encompasses situations where business operations are interrupted, not just when the premises are physically damaged.
- “Good-guy” Clauses: A “good-guy” clause allows commercial tenants to terminate their lease on short notice (e.g., 6 months or less) and also provides a mechanism to release personal guarantors. While such clauses can offer valuable flexibility, it’s essential to understand the specific requirements and notice periods. Seek to have the shortest notice period possible. Three (3) months is reasonable.
- Rent Commencement Date: It’s common for commercial tenants to require build-outs or improvements before occupying a space. Therefore, it’s vital that the lease provides a clear commencement date for rent payments, ensuring that you aren’t on the hook for rent while still in the process of obtaining permits or completing renovations. Even better is to make the rent commencement conditioned on the commercial tenant obtaining certain permits, such as a liquor license.
- Delay in Rent Payments: Some leases provide for rent “abatement” – essentially a delay in when rent is due – until after the landlord has completed specific obligations. This ensures the commercial tenant isn’t paying for space that isn’t fully functional due to the landlord’s delays. Be suspicious of leases that don’t provide for any abatement, even in situations where the landlord cannot fulfill its obligations pursuant to the lease.
- “As-is” Clauses: Beware of leases that convey the space “as-is.” While this suggests the tenant is taking the space in its current condition, make sure the landlord represents and warrants that any existing violations have been cleared, all taxes are up-to-date, and all necessary certificates of occupancy are in place before rent payments begin. Commercial tenants may have problems obtaining their permits if these violations (either caused by the prior tenant or the landlord) haven’t been corrected.
- Common Area Maintenance (CAM) Fees: CAM fees can vary dramatically and may include costs for landscaping, security, and general maintenance of common areas. It’s essential to clearly understand what is included in these fees and how they might change over time.
- Renewal Terms: Ensure clarity on the renewal options. While a lease might have favorable terms now, the renewal provisions might be less so. Look for details on rent increases, notice periods, and whether a right of first refusal is provided.
- Assignment and Subletting: Circumstances change, and there may come a time when you wish to assign the lease or sublet part or all of the space. Ensure the lease provides some flexibility in this regard and understand any conditions or restrictions imposed by the landlord.
- Termination and Restoration: Should you choose to leave before the lease term ends, it’s vital to understand any penalties and your obligations related to restoring the property to its original state.
In summary, while the specifics of a lease can vary, these ten issues are critical for SMBs to understand and negotiate where possible. Engaging legal counsel familiar with commercial real estate in your jurisdiction can help navigate these complexities and set your business up for a smooth leasing experience. Feel free to contact Burrell Law to see if we can help your business thrive.