Whether you are starting a new business or moving an existing business to a new location a lease is one of your most important documents. When embarking on a new lease relationship you might be tempted to get into the property quickly and skip the formalities. The details can be figured out later, right?
Spending the time upfront to ensure that all parties understand the terms of the lease is critical. The last thing you want to worry about while trying to get your business up and running is finding it a new home.
All businesses are unique and your lease should reflect this. You probably reviewed the initial term, base rent, and maybe even additional rent terms before signing, but here are some lesser known terms any business owner should pay close attention to:
Renewal Rights
Once you reach the end of the initial rental period or term, does the lease automatically renew? Many leases contain rights for a tenant to renew for additional rental terms, but require the tenant provide notice within a fixed window of time prior to the end of the initial term. Don’t miss this deadline! Your lease should also specify how rent in subsequent terms is determined. This may be an annual percentage increase, based on market valuations at the time of renewal, or fixed at a specific amount. Knowing upfront what happens to your lease once it’s time to renew will give you confidence as your move through the lease term.
Improvements to the Property
Improvements to the property can take many forms. This could be adding shelving, updating old appliances, or even the entire construction of a building. Tenants often are free to take any improvements with them at the end of the lease as long as removal of those improvements does not damage the property, or if removal does cause damage the tenant restores the property its original condition. Sometimes this is easy to fix by painting a few walls, however it can become very complicated. Consider if you build an addition onto an existing building but have a term in your lease to restore the property to its original condition prior to the end of the lease. You may be required to demolish that addition. Alternatively, some leases will provide that any improvements become the property of the landlord as soon as added to the property. Take a close look at these provisions in your lease before embarking on any improvements.
Assignment of an Existing Lease to New Owners
If you’re considering selling your business you will likely need your landlord’s consent in order for the new owners to take over the lease. This process is called an assignment of the lease. Your landlord may require information about the potential buyers and their business before they consent. Your lease may also contain language on a “change of control” for the tenant. A “change of control” is when the people controlling the business change, even if the business itself remains the same. If you have a company and bring in additional shareholders this can be considered a change of control and require the consent of the landlord. This process can take time to work through, so it’s best to be aware of what’s required under your lease before entertaining any offers from potential buyers.
These are just a few considerations to be aware of. As discussed, a bit of work upfront can save you headache and unexpected consequences later on.