Tips to Mitigate Risks in Commercial Lease Negotiation

Screen Shot 2015-02-09 at 8.46.17 AMYour lease does not have to be the cause for your business failure. While every business owner should exercise due diligence when entering, modifying or breaking the lease agreement, many landlords use reasonable business judgment to attract, retain or say farewell to their tenants.

When executing a commercial lease agreement, a business not only seeks to enable its operations, but it also acquires responsibilities that are critical to its success. A commercial lease agreement can be complex and may impose great liability if the tenant breaches the agreement or wishes to terminate the lease early.

In order to minimize risk, a prospective tenant must prepare well for the lease negotiation and understand its commitments under the lease agreement. When entering, modifying, or exiting the lease agreement, the following pointers can be helpful:

  • Get It in Writing. A lease agreement must be in writing in most states. The written agreement will control over any oral arrangements. Do not trust on any oral promises by the landlord, as these are likely not enforceable.
  • Validate the Identity of the Landlord. Make sure that the landlord has the legal power to lease the property. After signing the lease, if you discover that the landlord does not have the power to lease, this may invalidate the contract, and you may lose all deposits and investments made in the property.
  • Secure Options. A start-up business may wish to consider a shorter-term lease with options to renew upon lease expiration. A longer lease can represent a larger liability if the business fails, and this risk can extend to personal liability if the business owner signs a personal guarantee on the contract.
  • Get a Fair Deal. Conduct a “competitive rates” study of similar space prior to negotiating a rental rate, or in preparation to negotiate a lease modification. This will provide leverage that a reasonable landlord should consider.
  • Negotiate Your Right to Sublease. Negotiate a fair right to sublease or transfer the lease. This will provide added flexibility during difficult economic times or a need to change venue.
  • Maximize Your Security Deposit. The security deposit amount given at contract signing may likely be credited to the tenant at the end of the lease term under specific provisions, such as if the premises are left in good condition. When missing a payment or exiting a lease, ask the landlord to apply this deposit to amounts due. Some landlords may agree under certain conditions, even if the contract provides otherwise.
  • Mitigate Your Construction Risk. Often businesses fail before they can even begin to operate because of a poorly planned construction. To avoid this risk, make sure you have all the required construction permits and execute written contracts with all contractors, who must also be licensed and fully operational. Steer away from unstable contractors and subcontractors. Conduct due diligence before hiring them. Competitive landlords usually provide a rent-free period (“rent abatement”) so that the tenant can prepare the premises for opening, and many provide a financial allowance for construction or tenant improvements.
  • Explore Lease Buy-out Options. If you must exit the lease prematurely, and all other options have failed, try a lease buy-out. A reasonable landlord may consider a cash payout of a lump sum much smaller than what is due under the lease, in exchange for the release of your lease agreement. If this does not work, you can try to negotiate an installment settlement payable over time. These alternatives are less expensive than walking-out on the lease and having to defend a lawsuit for the remaining rent due on the contract, plus attorneys fees and damages.

Trying the above may free much needed resources that can be used to re-energize your business, or can simply help end or mitigate losses in a difficult situation.

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* This article is based on material from the book “Does Your Compass Work? Practical Legal Guide for Florida Businesses,” Copyright © 2008-2015 Yasmin Tirado-Chiodini. All Rights Reserved. This article is provided under a Creative Commons License.

NOTE: A business owner should consult an attorney of their preference to assist with legal decisions.

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About tiradochiodini

I am a attorney, entrepreneur and author blogging about business, law, entrepreneurship, writing, books and other subjects.
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