Reconnaissance is Key – A Veteran Business Owner’s Guide on Commercial Leases

(Vets to Ventures features articles addressing legal and business topics impacting service members and veterans.)

Veteran business owners: whether you are setting up shop in an office building or in a retail strip mall, your commercial lease is a critical piece of your company’s mission. Just like a well-defined business plan, a clear and favorable lease agreement can set you up for success and protect your investments. Navigating the intricacies of these documents can feel like unfamiliar territory, but with a keen eye for detail, you can secure terms that work for your business.

In our monthly Adams & Reese “Vets to Ventures” article, we discuss key legal considerations for veteran business owners to consider during negotiation and throughout the lease term.

Know Your Terrain Before You Engage

Before you even set foot in a potential space, remember your military training: reconnaissance is key. To best negotiate commercial leases, understand the market rates for similar properties in the area, and research recent lease agreements. This intelligence will give you the leverage to best negotiate your position. The following are critical items to consider:

• Rent and Increases: Don’t just focus on the initial monthly payment. Scrutinize the rent escalation clauses. Are they fixed percentages annually? Are they tied to the Consumer Price Index (CPI)? Understand the frequency and impact of these increases. Negotiate for caps on annual increases or explore options for fixed rent for a longer initial term. You can also try to negotiate an abatement of rent to assist with cashflow as you get into your new space. Ask for a tenant improvement allowance to help offset the costs of customizing the space.
  
  
• Operating Expenses or Common Area Maintenance: These charges cover the costs of maintaining shared areas, such as landscaping, parking lots, and security. Request a detailed breakdown of what’s included and how costs are calculated. Negotiate for transparency and reasonable limitations because uncontrolled operating expenses or common area maintenance costs can impact your operating expenses. Negotiating for a cap on controllable expenses will protect your exposure.
• Lease Term and Options to Renew: The initial lease term provides stability but consider your long-term business plans. Negotiate for options to renew, giving you the right, but not the obligation, to extend the lease at the end of the initial term. Understand the notice periods and any potential changes in rent during the renewal period. A longer initial term might offer more favorable rent, but ensure it aligns with your projections.
  
  
• Use Clause: This clause defines how you can legally use the leased space. Ensure the clause is broad enough to encompass your current and potential future business activities. You don’t want to be restricted later if you decide to expand your services or offerings.
  
  
• Exclusivity Clause (Retail): If you're in a retail strip mall, consider negotiating an exclusivity clause that prevents the landlord from leasing space to a direct competitor within the same center. This can be crucial for protecting your market share.
  
  
• Subletting and Assignment: Your business needs might evolve, or you might consider selling. Understand the terms under which you can sublet (lease to another tenant) or assign (transfer your lease obligations) the space to a third party. Landlords often retain significant control over these processes. Negotiate for reasonable consent requirements.
  
  
• Personal Guarantees: Landlords may require a personal guarantee, especially for newer businesses. This means you are personally liable for the lease obligations. Understand the implications and try to negotiate limitations or a “burn-down” clause where the guarantee decreases over time as your business establishes a strong track record, you may also try to negotiate a security deposit or letter of credit in lieu of the guarantee.

Maintain Your Operational Readiness

It is critical to understand your responsibilities once the lease is signed. Knowing your obligations is paramount to doing your best to avoid disputes and/or possible litigation.

• Property Maintenance and Repairs: The lease should outline who is responsible for what. Typically, the landlord handles structural repairs and common area maintenance, while the tenant is responsible for maintaining the interior space. Pay close attention to clauses regarding HVAC, plumbing, and electrical systems. Understand your obligations for routine maintenance and what constitutes a landlord’s responsibility. Document the condition upon move-in with photos and a written report to avoid any disputes later.
  
  
• Insurance: Your lease should specify the types and amount of insurance that you are required to carry, which typically includes commercial general liability insurance. Ensure your coverage meets these requirements. Verify with your insurance broker the terms are in accordance with market standards and provide adequate coverage.
  
  
• Compliance with Laws and Regulations: As a business owner, you are responsible for complying with all applicable federal, state, and local laws, including zoning ordinances, building codes, and ADA (Americans with Disabilities Act) requirements. Understand your obligations for ensuring your space is compliant.
  
  
• Indemnification Clauses: These clauses allocate responsibility for potential liabilities. Understand what you are agreeing to indemnify the landlord against and seek legal counsel if you have concerns about the scope of these clauses.  

Over and Out: Communicate Any Lease Disagreements

Even with a well-negotiated lease, disagreements can arise. Proactive communication and a clear understanding of your rights are essential in a commercial tenant-landlord relationship.

• Breach of Lease: Understand what constitutes a breach of the lease by either party. This could include failure to pay rent, failure to maintain the property, or violation of the use clause. The lease will outline the remedies available to the non-breaching party.
  
  
• Notice Requirements: Pay close attention to the notice requirements outlined in the lease for any communication, whether it's regarding repairs, rent payments, or intent to renew. Failing to provide proper notice can have legal consequences.
  
  
• Mediation and Arbitration: Many commercial leases include clauses requiring mediation or arbitration before resorting to litigation. Understand these alternative dispute resolution processes.  
  
  
• Legal Counsel: Don't hesitate to seek legal advice from an attorney specializing in commercial real estate. Reviewing the lease before you sign can save you significant headaches and expenses down the road. An attorney can help you understand the legal jargon, identify potential pitfalls, and negotiate favorable terms.  

Conclusion and Your Mission Forward

As veteran business owners, you possess unique skills in leadership, strategic planning, and attention to detail. Apply these skills to your commercial lease.

By understanding the terms, negotiating wisely, and maintaining open communication with your landlord, you can secure a foundation that supports your business growth and minimizes potential legal challenges. Remember, a well-understood and favorable lease is not just a piece of paper; it's a strategic asset for your entrepreneurial success.

About Our Authors

Sean Buckley is a corporate services attorney in the Houston office and a veteran U.S. Navy Officer. Sean advises clients in the purchase and sale of equity and assets, in a diverse array of industries, real estate transactions, entity selection and formation, corporate governance, and franchise opportunity matters.

John Woods is a member of the Adams & Reese Financial Services Practice Group, and a former infantry officer in the U.S. Army National Guard. Practicing in the firm’s Memphis office, John represents corporate clients in commercial litigation, business disputes, and insurance defense litigation that encompasses professional liability claims, mostly in health care and real estate. He is an experienced trial and appellate attorney.

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