Small businesses that need to lease commercial space often don’t read the lease that they sign close enough. Based on recent litigation, we offer the following tips on commercial leasing:
Beware of signing a personal guaranty. A properly formed and maintained corporation or LLC can insulate your personal money from business creditors. Thus, if a business fails and cannot pay rent, a commercial landlord could not seek personal monies (it would be limited to the assets of the business) unless a personal guaranty were signed. In today’s commercial leasing market, you should try to decline a request for a personal guaranty. In my current law firm space, I was asked to sign a guaranty, but a sharp “no” from my broker ended the discussion.
If it is a real sticking point and you must have the space, nevertheless, you should try alternative suggestions: put some rent in escrow or pay some in advance, or limit a guaranty to a particular dollar amount or have it decline as the lease goes forward. Do not—absent the most compelling reasons—put your personal monies at risk.
Beware of all charges that you don’t understand. In a recent case our firm handled, the landlord had grossly overcharged the commercial tenant for CAM (common area maintenance) charges. Even in the litigation, the property tax amounts were overstated when compared to the lease provisions. The landlord calculated the interest without giving credit for the cure provisions, contrary to the lease terms. Do not assume that a computer printout of charges is correct, and do not assume the landlord has given you credit for all payments.
Try to negotiate your way out of a bad situation. Maybe you can help them find a new tenant for the space. Perhaps you can negotiate a six-month buyout of the lease. Maybe you can move to less expensive or less extensive space. Think win/win.
Before you move out or negotiate an exit, consult an attorney so that you know whether the lease you signed leaves you with any leverage. When you sign a lease, you are generally not considering the possibility of failure. It is therefore easy to overlook lease provisions that could be negotiated away or modified. I have found it to be generally a good practice to think through what will happen if a venture is successful beyond expectations and what will occur if it fails.
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