Continued from Mistake #2: Not Having an Operating Agreement (Partnerships and Corporations)
Mistake #3. The Contents of Leases
When you start a small business, you will need to consider where that business will be located. If your business is not a home-based one, this may be the first time you have had to deal with a commercial lease. Although such leases generally favour the landlord, there is some room for negotiation, and you should take advantage of that opportunity.
As a starting point, it is important to understand that business leases are not like residential rentals. With a residence, rent is usually restricted to a set monthly price, which may or may not include utilities. The landlord is responsible for repairs, and the terms of the Residential Tenancies Act help protect the rights of tenants. With business leases, on the other hand, there are often many other costs beyond the base monthly rent; for example, common area maintenance costs, the costs of certain repairs, and possible personal guarantees.
A second consideration: put everything in writing. Make certain that everything that you discussed and agreed upon (especially if they are changes to a previous draft) is included in the written agreement. No matter what the promise, if it is not included in the lease, it will likely be excluded by a clause that says something like “this lease is the entire agreement between the parties.”
It is imperative that you read the lease very carefully, watch for errors, and ensure that you understand the terms to which you are agreeing. A thorough understanding of the lease clauses will help you avoid surprise costs (which could sink your business). The following are a few examples of the clauses that could cause trouble if they are wrong or misunderstood.
An error in identification can have serious repercussions. For example, if you are forming a corporation and you list your personal, not corporate name, you may become personally responsible.
This includes the address, the unit number, and any additional space not included in the base units (such as access to storage rooms, conference rooms, parking, and kitchen facilities). Base charges are often calculated by the square foot – be sure to confirm all measurements.
This describes the length of the lease. Some leases specify the starting and ending dates. Other leases start as of the date the landlord finishes the building adjustments that you requested, or the date the lease is signed. You may have financial responsibilities even if you have not yet taken possession. Be sure you know and agree to the date that your responsibilities will start.
These provisions limit how you are allowed use the space. The limitations can be as broad as what business you will conduct or as narrow as what specific services or products you will offer. In general, the fewer such restrictions, the better for you.
In commercial leases, rent is often far more than a base monthly amount. Make sure you understand which parts of the landlord’s operating costs will be passed on to you.
This clause ensures that if the landlord sells the building, your lease will be honoured by the purchaser. Without such a clause, you might find yourself without business premises. If this clause is not in the landlord’s standard lease, you may want to consider negotiating for it.
An assignment occurs when someone takes over a lease (one of the parties is replaced by a third party). Leases generally require the consent of the landlord for an assignment. Some even provide specific requirements in order for the landlord to consent. Take note of any such requirements so that you can determine if you can meet them and so that you know what you need to do when the time comes. Also note whether you will remain liable for the lease after you have assigned it.
Such a clause concerns your duty to care for the rented space. Some of the maintenance costs will be yours – be sure you know which ones and that you can live with the proposed arrangement.
Insurance is available to cover the risks of leasing commercial space. Sometimes a lease requires certain kinds of insurance as well as certain minimum dollar limits. Be sure you know and understand these clauses before you arrange for insurance coverage and before you move into, and start using, the business premises.
With any luck, your business will thrive. After the expiry of your lease, you may wish to stay in your current location. In anticipation of such a possibility, you may want to negotiate renewal options at the outset. Options include an automatic renewal (if you want it); a right of refusal (meaning the landlord must offer the space to you first); a fixing of the future rent for that renewal; and a formula for the determination of that rent. With any luck, your business will thrive. After the expiry of your lease, you may wish to stay in your current location. In anticipation of such a possibility, you may want to negotiate renewal options at the outset.
Continue reading: Mistake 4: Not Being Adequately Insured