Meet Josh, Amy, and Michael.
They all just recently signed a new commercial lease for their respective businesses, and they all end up with major headaches that they each could have easily prevented.
Let’s look at three common mistakes business owners make with new leases that you can avoid.
Commercial Lease Mistake #1: Not checking exclusivity rights and restrictions
Josh just signed a 3-year lease for new space at a new neighborhood shopping center to open his novel coffee & breakfast concept that blends gourmet coffee creations with simple, healthy breakfast options. The rental rate is reasonable, and the location is excellent with plenty of foot traffic, visibility, parking, and accessibility is all there.
Problem: As Josh’s business opened and began to grow sales, he noticed his customers asking for tea options as well as sandwiches. So he added those options only to receive a notice from the landlord to cease and desist with his new menu items as the existing tenants on the property, a tea bar, and a sandwich shop, had exclusive rights to those items. Josh had no idea he needed to be aware of the exclusive rights of the other existing tenants. He felt cheated and wondered what other restrictions are in place.
Always ask the landlord for any existing exclusivities on the property from existing tenants.
Commercial Lease Mistake #2: Not negotiating an out if the business fails
Amy just signed a 5-year lease for her new trendy boutique clothing and jewelry store in a popular neighborhood mall. The rents are a bit higher than she would like but the mall is busy all the time, and she’s very confident she’ll meet or exceed her sales goals.
Problem: A brand new mall opened across town two years later and practically turned the old mall into a ghost town overnight. Within months of the new malls opening, Amy saw her sales drop by 70%. There was no way her business could survive. She went to her landlord to end her lease but discovered that she is financially on the hook for the remainder of the lease contract. She hadn’t negotiated a right to leave the lease if her business went out of business.
All business owners enter a new business with hopes and dreams of great sales and profits. But that’s not always the case. If your business does not turn out to be viable, make sure you’re not still responsible for years worth of rent.
Commercial Lease Mistake #3: Not understanding the numbers fully
Michael needed office space for his growing CPA practice that he had been running out of his home office. He researched and compared many locations before ultimately narrowing it down to his top 3 choices. He negotiated hard on the rental rate and got one landlord to offer him a significantly lower rent than the other locations, in exchange for a long seven-year lease. He took the deal.
Problem: Michael was only looking at the base rental rates, and he didn’t even know the difference between Gross and Net leases. What he thought was the most economical lease turned out to be the most expensive option once all the additional rental expenses were factored in. He also neglected to understand the rent escalations in the agreement thoroughly. Two years later, he was paying even higher rents but is now stuck with a long lease with no options to get out.
Base rent is can be set low to draw unsuspecting and naive business owners into signing pricey leases. If you’re not exactly sure of what you’re paying for each year of the lease agreement, go talk to an advisor before you sign any agreement.
As you can see, these are just three examples of costly mistakes that business owners often make when it comes to signing new commercial leases.
All of these are preventable if they knew what to look for before they signed on the dotted lines.