LLOYDMINSTER, Saskatchewan — When drycleaning plant owner/operators rent their store-plant space, the haunting questions focus on the considerations that should be taken into account prior to entering into a longer-term rental agreement or perhaps renewing an existing lease.
Selecting an appropriate space from which to profitably conduct business should be a meticulous procedure, far more than just finding an empty spot where the rent is cheap, signing a lease agreement, making a few improvements and then moving in. Overlooking seemingly insignificant considerations could spell disaster.
TYPES OF LEASES
There are usually three types of leases with which to be concerned: the “gross lease,” the “net lease” and the “parol lease.”
With the gross lease, the only additional occupancy cost is utilities, and perhaps maintenance. With the net lease (aka “triple net”), all property operating costs, such as building insurance, taxes, repairs, utilities, etc., are added to the rent; if a multi-tenancy property, it is your share based on your occupancy percentage of the whole.
A trap for the unwary: gross leases often contain escalator clauses whereby as the cost of taxes, insurance, etc., increase, your rent also increases proportionately.
The parol lease (an oral lease that is legally enforceable) is usually a gross lease with a month-to-month tenancy. That is, you could be out at the end of the next month. Percentage leases are rare in drycleaning plants, but a landlord may try you on for size. By this, after a stated annual revenue is obtained, the landlord receives a percentage of all additional income.
OTHER CLAUSES
Be certain that the right to transfer or assign the lease is contained in the agreement, and, if the lease is assigned, any prepaid rent is yours, not retained by the landlord. This is a common trap. Many leases contain the clause by which prepaid rent is the landlord’s to keep.
Most leases contain a clause by which all interior improvements become a part of the building. Although installed at your expense, as title passes to the lessor, you cannot remove them; if selling your plant, expect a purchaser to buy these improvements. Although you paid for them, they are not yours to sell. Haggle over this one to your benefit. (A point in passing: If you cannot amortize the cost of the improvements during the first lease term, either their cost or the rent is too high.)
Start-up rental holidays, fixture and move-in allowances are common. Most property owners expect to contribute two or three months’ rent to induce a tenant to occupy a vacant area. So much depends on how badly he/she wants you in and how long it has been vacant. A step-up clause that provides for a low initial rent, then periodic increases, may seem benevolent. Most only let the tenant in gently, then soak it later.
Negotiate the length of lease based on your comfort level. If your drycleaning plant is a sure winner at a low rental cost, go for a longer term; if uncertain, the shorter. Either way, as it costs nothing extra and may protect your investment, always include one or two renewal options.
Remaining are several standard and specific-to-a-particular tenancy clauses. The point is, before signing, pore over and negotiate each separately, considering its effect on your plant’s operation, income and profitability. Never assume that, when first presented, all terms and conditions are engraved in stone. So much depends on the negotiating skill of the parties.
Finally, look before you lease. You must live with it for a long time. If the terms do not work for your benefit, your troubles may have just begun.
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LEASING COMMERCIAL SPACE
Leasing commercial office space is one of the largest expenses incurred by new and expanding businesses, says the U.S. Small Business Administration (SBA), so it is important to do your due diligence. Here are some tips from the SBA for negotiating a commercial lease for your small business:
LEASE AGREEMENT. Lease term and rent are your first negotiation points. It is generally recommended that small businesses negotiate one- to two-year leases with the option to renew. You will also want to factor in rent increases over the term, and renewal options so you are not charged with an unexpected rent increase without warning.
Consider working with a broker to help you negotiate with the landlord. It is also important to consult a knowledgeable real estate lawyer; they can often recommend the right choice for you and protect your interests as you negotiate your lease through the broker.
EXPENSES. In addition to your monthly lease payment, find out what expenses you may incur beyond rent.
Commercial real estate landlords often incorporate extra expenses such as maintenance fees, upkeep for shared facilities (Common Area Maintenance, or CAM), etc. Other expenses to consider are utilities. These charges are usually the responsibility of the tenant, so find out how these are measured. Are they individually metered or apportioned by square footage? Ask to see these “hidden fees” and policies as well as examples of costs that are typically incurred by tenants.
MAINTENANCE AND REPAIR. While residential leasing often places the burden of maintenance and upkeep on the shoulders of the landlord, commercial leases are different. Commercial leases vary regarding maintenance and repair – some stipulate that the tenant is responsible for all property upkeep and repairs while others specify that the tenant is responsible for systems like air conditioning, plumbing, etc.
READ THE LEASE. Be sure to read over your lease in detail and hire an attorney who specializes in commercial real estate to walk you through the clauses and fine print.
PROTECT YOUR BUSINESS. To protect your investment and long-term business interests, it is worth investigating and negotiating some potential add-on clauses to your lease. These might include:
Sublease – This builds in some flexibility, allowing you to sublet your space to another business.
Exclusivity clause – Prevents the landlord from leasing other spaces on the property to a direct competitor of yours.
Co-tenancy – If the property’s anchor tenant closes business, a co-tenancy agreement can protect you from a potential loss of customers, allowing you to break the lease if the landlord does not replace the anchor tenant in a specified time period.
WHAT IF YOU DEFAULT? Should you default on your lease payments, there are steps you can take during the lease negotiation process to protect yourself. Find out what the lease agreement states. Will you be locked out immediately? Will the landlord initiate eviction proceedings? Can you negotiate more time? Could you pay only the current month’s rent instead of the remaining amount owed on the lease?
Have a question or comment? E-mail our editor Dave Davis at [email protected].