For many new entrepreneurs, signing a commercial lease seems just like signing any standard residential lease. But this is far from the case. Commercial lease agreements differ in many respects from a residential lease, and if you want your business venture to succeed it is crucial, you understand those differences. Here’s what you need to know about NYC commercial lease agreements and what to consider before signing one.
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What is a commercial lease?
A commercial lease is used when renting out a business property from an individual or other business. It has various names such as business lease, commercial property lease, commercial real estate lease, industrial lease or office space lease. Regardless of the name used, it’s the same thing.
The lease gives the renter the rights to use the property for whatever purpose defined in the lease. As with a residential lease, it will set a period by which the rules will apply for that property. There are two types of contracts, a short version, and an extended version. A short version sets out the general lease parameters while the long one is more specific in the terms included.
How does a commercial lease differ from a residential lease?
It is vital that you understand from the beginning how a commercial lease differs from a residential one. The main differences are:
- Fewer consumer protection laws – A tenant’s rights are almost all governed by the lease. Meaning you are not subject to the same consumer protection laws that govern residential leases. For instance, unless stated in the lease, the landlord is not required to provide heat or make repairs.
- No standard forms – Residential leases come in standardized forms whereas commercial ones do not. Therefore, you should read each one carefully.
- Long-term and binding – It is very difficult to break or change a commercial lease once signed. Also, there are no restrictions on how much the landlord can raise the rent by when the lease ends nor are they required by law to renew it.
- No privacy protection – Unless outlined in the lease, a tenant has no privacy protection.
In effect, commercial leases offer little to none of the protection and rights that a residential lease does. The first draft you are presented with is likely to heavily favor the landlord in its terms. When negotiating, the tenant should make it clear to the landlord what their business needs are. Landlords will often make special offers for business tenants but make sure that any agreements make it into the lease in writing.
Considerations to make when signing a commercial lease
Before you even think about signing a lease, you have to carefully investigate its terms to see if it meets your business needs. First, consider the rent and whether you’ll be able to pay it. For new businesses, it’s better not to tie yourself down with a 5-10-year lease. You don’t know how fast your business may grow and you could find yourself having to change the location to meet its expanding needs. A short-term renewable lease is always a safer option.
Also, consider possible changes you may need to make to the building as your business grows. Does the lease allow you to make modifications to the property such as installing a rewiring for better communications or converting two adjoining rooms into one? If so then who will pay for them and who will own them once the lease ends?
In addition to your monthly rent, you may also have to pay real estate taxes and maintenance costs. Unless explicitly stated in the lease, the landlord is not responsible for maintaining or repairing the premises. The lease will state who is responsible for paying these as well as utility costs. So make sure you have the financial reserves to deal with potential emergency maintenance costs you could be responsible for.
Other critical terms to understand
Remember, the devil is in the details so pay attention to any terms such as:
- The security deposit and the conditions of its return.
- Specifications for signs such as were you can put them.
- Whether the lease can be assigned or subleased to another tenant.
- If and how the lease may be terminated.
- Whether you or the landlord is responsible for modifications by the Americans with Disabilities Act (ADA).
- Precisely what space you are renting and how the landlord measures that space.
Signing a commercial lease is a big decision that can have huge repercussions for years. Even if you’ve carefully read the lease, you should still consult an experienced real estate attorney before signing. If they spot anything unfavorable, they’ll be able to work with the landlord to come up with terms that are more favorable to you and your business.