Renting a first (or next) office space can be an stressful time in the life of a small business owner. You survey your options, decide on a budget and location, and then your landlord’s attorney sends you a long, incomprehensible lease form with a list of terms, and would like your signature as soon as possible please.
Before you sign that form, there are several terms you may want to negotiate, whether with or without the assistance of counsel. If not, you could be signing away important rights that may affect you and your business for years to come.
1. Allow Assignment & Subletting
Your business is an uncertain proposition. While profitability and growth are the end goals, the reality is that not every business will succeed. Under North Carolina law, the default rule is that you can assign and sublet your premises as a tenant. Odds are, your landlord will attempt to remove this right, or at least restrict it in the lease. Protect yourself against contingencies by requesting an ability to assign or sublet the remainder of your interest in the lease, should you need to leave early. At the very least, include language that forces the landlord to not unreasonably withhold consent to assign or sublet.
Along the same lines, it is usually advisable to include an early termination option for a long-term lease. Again, you can’t predict where your business will be in five or ten years, and it is best to prepare for the worst case. An early termination option will likely be accompanied by a penalty of some sort, but that will be preferable to being stuck in a lease that is too long or too expensive for your needs. One creative solution is to tie the exit penalty to your business revenue such that you are able to comfortably afford all of your options.
2. Include an Extension or Renewal Option
Just as you want to protect yourself against the downside risks above, you want to be able to take advantage of the upside as well. If business is booming, you may not want to face an unknown rent hike or a notice of termination at the end of your term. Try to negotiate a renewal option that allows you to extend the term of the lease on favorable terms. Among these terms will be the monthly rental rate (of course) and ideally a liberal notice provision, which will give you ample time to exercise your option with full information.
3. Avoid a Personal Guarantee (If Possible)
Most commercial landlords will include a term in their standard form lease making you personally responsible for the total rent amount of the term of the lease, in case your business cannot make the payments. In some cases this cannot be avoided, as a landlord is unwilling to take a risk on the ability of your business to succeed and make timely payments.
However, if you can avoid this, do. The personal guarantee, when combined with other default and acceleration provisions can sometimes put you personally on the hook for a considerable sum in the event of nonpayment, late payment, or other specified breach events.
The above are just a sample of the terms you should be aware of in the negotiating process. Have questions about your upcoming lease? Have you seen other issues that deserve mention? Get in touch with us to discuss.