Rather than owning real property as a place to conduct your business, perhaps leasing space is a better option. It is often said that real estate ownership is location, location, location; the same can be said about commercial lease property. There are many considerations and options that a business owner should evaluate when negotiating a commercial lease. New York courts do not offer the commercial tenant the same types of protection that are afforded to a residential tenant, since the courts view the commercial landlord and commercial tenant as economic equals. Consequently, a commercial lease agreement has more legal terminology than a residential lease. It is inevitable that a small business owner will see the legal terms of ?lessor? and ?lessee.? A lessor is the landlord and a lessee is the tenant.
Larry Covell
Most commercial lease clauses fall into two major categories: monetary and non-monetary. Monetary clauses can be more than just the amount paid for rent. There are several types of monetary clauses, and the small business owner must weigh the pros and cons of each. A ?gross lease? requires the commercial tenant to pay a flat monthly amount of rent with no consideration to other costs of real estate ownership. The commercial landlord would be responsible for insurance, repairs, taxes and other building costs. In a ?net lease,? the commercial tenant pays monthly rent plus some or all of the real estate taxes. If the commercial tenant is leasing a portion of a larger building, special care should be used to ensure the small business owner is paying on the portion actually being leased. It is customary to allocate the real estate taxes on the basis of the proportion (square foot basis) of space leased.
Paying some or all of the landlord?s operating expenses is enlarged with the ?net-net lease? and ?net-net-net (triple net) lease? type agreements. A net-net lease agreement requires the tenant to pay not only a monthly rental amount but the landlord?s real estate taxes and insurance expenses on proportional space basis. The payment of the commercial landlord?s expenses becomes income since operating expenses of real estate ownership is reduced. If there is a fire or other covered loss to the building, as provided by the insurance policy, the commercial tenant is not usually afforded any insurance proceeds since there is no insurable interest in the lost. The commercial tenant should, on the other hand, have insurance coverage on their business assets. The triple net lease agreement requires that the commercial tenant pay a monthly rent and all landlord operating expenses, such taxes, insurance and maintenance.
Non-monetary type clauses are important and can have far reaching financial effects on your business. One of the key clauses a small business owner should consider is an ?out clause.? How do I get out of this lease? As mentioned, New York courts do not afford the same level of protection to a commercial lessee as they do to a residential lessee. If a residential renter wants out of a lease, they can simply notify the landlord and, in most cases, is required to pay a month?s rent. Another option is to assign the remaining portion of the lease to another party. A landlord cannot unreasonably withhold permission from this action.
However, in a commercial lease, a commercial landlord usually can prohibit an assignment and the small business owner may be responsible for rent payments until another commercial tenant is located. In a sluggish economy, this could take several months.
Another concern for the small business owner is to correctly identify the business entity that is entering into the lease agreement. If your business is a corporation, limited liability company, limited partnership or other business entity, the entity?s name should be stated on the lease agreement. Avoid entering into the lease and signing it only in your name since that action would make you personally liable on the agreement. The lease agreement should name your business entity as the lessee, and you should sign the agreement in a representative capacity.
Commercial lease agreements are complicated documents with far reaching legal and financial implications. Before you bind your business or yourself, you should seek guidance from an attorney.
Larry Covell is a professor of business at SUNY Jefferson and an attorney. Contact him at lcovell@sunyjefferson.edu. His column appears every other month in NNY Business.
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