Commercial Lease Agreements: What Small Business Owners Should Watch Out For
Real Estate | Areas of Practice
Signing a commercial lease is one of the biggest commitments a small business owner can make. Unlike a residential lease, a commercial lease is largely unregulated, which means the terms are highly negotiable and the stakes are high. A lease that looks straightforward on the surface can contain provisions that cost you significantly down the road.
At Stimpson & Associates, we help small business owners across Southeast Michigan review and negotiate commercial leases before they sign, so there are no surprises after move-in.
Commercial Leases Are Not One-Size-Fits-All
Residential leases follow a fairly standard format, and tenants have built-in legal protections. Commercial leases are different. They are typically drafted by the landlord’s attorney and written in the landlord’s favor. Everything from the rent structure to who pays for repairs is open to negotiation, but only if you know what to look for.
Here are some of the most important provisions to review carefully before signing.
Rent Structure and Escalation Clauses
Not all commercial leases work the same way. Common structures include:
- Gross lease — you pay a flat monthly amount and the landlord covers most operating expenses
- Net lease — you pay base rent plus some or all of the property’s taxes, insurance, and maintenance costs
- Percentage lease — common in retail, where rent is tied in part to your business’s gross sales
Beyond the base rent, watch for escalation clauses that allow the landlord to increase rent over time. Make sure any increases are clearly defined and capped so you can plan your finances accordingly.
Who Is Responsible for Repairs and Maintenance?
This is one of the most commonly misunderstood areas of a commercial lease. Depending on the lease type, you may be responsible for maintaining not just the interior of your space, but HVAC systems, plumbing, and other building components. Before signing, get clarity on exactly what falls under your responsibility and what falls under the landlord’s, and make sure it is spelled out in writing.
Personal Guarantees
Many commercial leases require the business owner to sign a personal guarantee, meaning if your business cannot pay the rent, you are personally on the hook for the remaining balance. This is especially common for newer businesses without an established credit history. If a personal guarantee is required, try to negotiate a “burn-off” provision that phases it out after a period of on-time payments.
Permitted Use Clauses
A permitted use clause defines what type of business you are allowed to operate in the space. If your clause is written too narrowly, you may be restricted from expanding your offerings or pivoting your business model in the future. Make sure the clause is broad enough to accommodate reasonable growth.
Exclusivity Provisions
If you are leasing space in a multi-tenant building or shopping center, consider negotiating an exclusivity clause. This prevents the landlord from renting nearby space to a direct competitor. Without it, there is nothing stopping another business in your industry from moving in next door.
Exit Options and Lease Flexibility
What happens if your business grows faster than expected, or faces an unexpected downturn? Review the lease carefully for:
- Renewal options — do you have the right to renew, and at what rate?
- Subletting and assignment rights — can you transfer the lease if you sell your business?
- Early termination clauses — under what circumstances can you exit the lease, and what are the penalties?
These provisions can make a significant difference if your situation changes before the lease term is up.
Don’t Sign Without Legal Review
Commercial leases can run for five, ten, or even more years. The terms you agree to today will affect your business for a long time. Having an attorney review your lease before you sign is one of the most cost-effective investments you can make as a business owner.
How Stimpson & Associates Can Help
Our attorneys work with small business owners in Ann Arbor, Adrian, Ypsilanti, and throughout Southeast Michigan to review and negotiate commercial leases. We will help you understand what you are agreeing to, flag provisions that put you at risk, and negotiate terms that protect your business.
Contact us today to schedule a consultation to schedule a consultation before you sign.
Stimpson & Associates serves clients in Ann Arbor, Adrian, Ypsilanti, and throughout Southeast Michigan. This article is intended for general informational purposes and does not constitute legal advice. Please consult an attorney regarding your specific situation.