What Should I Do Before Signing a Lease?

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This piece of local business legal advice is brought to you by Arizona's Finest Lawyers. Learn more about their organization at www.azfinestlawyers.org

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As the market picks up, more and more business owners are either opening their first shop, or moving to newer and better locations. Whether it’s your first time as a business owner or you’re a veteran, moving into new space usually means one thing: signing a lease. And while it’s probably the least interesting part of business ownership, your lease will be the most important document between you and your landlord. Think of it as a partnership agreement with your landlord that will be the basis of your relationship for years to come. So before signing that document, what should you do and what are some things you should look for?

  1. Location, Location, Location. You’ve identified the ideal spot for your business, but you shouldn’t stop there. Find out how much parking is available, whether you’ll be entitled to reserved spaces (and at what cost), what kind of signage you’ll be allowed to display and whether you’ll have 24/7 access to the building.

  2. I’ve Got the Lease – Now What? Read it. Yes, it’s a lengthy and boring document, but remember, once you sign it, you’re bound by it. So read it carefully and make sure the terms from your LOI are in the lease. There’s no “standard” commercial lease form, and there are very few statutory regulations governing commercial leases, so this document will be much different from any residential lease you’ve ever signed. Once you’ve read it – and before you sign it - it’s a good idea to hire an attorney to go over it with you.

  3. How Much Will This Cost Me? It’s important to understand what you’ll be paying the landlord. Pay particular attention to the rental section to figure out what “rent” means and whether you’ll have to pay any other fees on top of rent (like common area maintenance fees (commonly called CAM)). If you’re paying CAM, then review that provision to determine what maintenance expenses you’ll have to pay. To keep costs manageable, ask your landlord for a cap on how much your CAM obligations increase each year. Make sure you understand how (and how often) your rent escalates. In some cases, rent increases by a percentage, but in others, rent increases by fair market value. If yours increases by fair market value, understand how the landlord will determine that amount. Additionally, review the lease’s insurance obligations so you know how much insurance your landlord will expect you to carry.

  4. When Can I Move In? Before signing your lease, have a clear understanding of who will prepare the space for you. Regardless of whether it’s you or the landlord, read the work letter attached to the lease to confirm your understanding of each party’s construction obligations. If you’re going to build out the premises, then pay close attention to the landlord’s requirements for your plans and specs. If the landlord will give you an improvement allowance, then confirm the conditions you must meet to get the allowance, and when the landlord will pay it. If the landlord will do the construction, then find out when the landlord expects to deliver the space to you.

  5. This Isn’t Working Out. It’s always a good idea to have an exit strategy, even if you don’t expect anything bad to happen. If you want to sell your business, then you’ll first need to make sure you can assign your lease, so ask your landlord to be reasonable when you make an assignment request. If your landlord will require you to pay a fee for reviewing your request, ask the landlord for a cap on how much you’ll have to pay. There’s no guarantee that your landlord will consent to any transfers, but you want your landlord to be as reasonable as possible. Additionally, know what happens if you default. No one signs a lease expecting to default, but you need to understand what actions your landlord may take against you if you find yourself in that position. Arizona commercial landlords have very few restrictions against them when it comes to tenant defaults, and their remedies include lockouts and selling property on the premises at a landlord’s lien auction.

Signing a commercial lease doesn’t have to be a daunting task, and this article, while not an exhaustive list of things to look out or ask for, gives you a head start. If nothing else, be sure you’ve carefully reviewed each provision so you can go into your new venture as informed as possible.

For more information on commercial leasing, contact Erin Szajna at [email protected].