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The Importance of a Lease in a Business Transaction

A commercial lease represents a major area of consideration in today’s complex business world. The commercial lease can come up in two ways. First, a business owner will encounter a commercial lease when looking to lease a space for the business. Second, the commercial lease provisions and status might represent a significant advantage (if the lease is properly negotiated from the beginning) or a disadvantage when a business owner wants to sell the business. The economic terms as well as the assignability of the lease might represent a significant issue when negotiating the sale of the business. Let’s look briefly at both cases. Once you have determined your business needs, you will no doubt be looking to lease the right space. When looking for a space, you need to consider some of the ‘outer’ attributes, such as neighborhood, parking, signage, etc., as well as scrutinizing the interior space. Often times, the leased space will have a dramatic impact on the success of your business venture. In some businesses, the right physical location of the business might represent most of all of your marketing needs! Reducing the necessary capital to operate your business represents a major advantage of leasing, whether the business is a new venture or a mature business operating for many years. You gain the use of a facility without spending the money or incurring massive debt required to purchase the facility, which reduces your risk associated with the business. Purchasing the facility may cost less in the long run, plus provide you with the appreciation of the space over time (or save your from the reduction of value). Of course, you may not be in a position to purchase when you launch your business venture. To better make the lease/buy determination, you need to engage in a cash flow analysis with your accountant, business attorney and/or financial consultant. If you are going to lease, then you should brush up on the following terms: gross lease, net lease, fixed lease, step lease, percentage lease, lease term, rental rate, escalation clause, maintenance, competition, subletting, improvement and modifications, taxes, and insurance and liability. Engaging the services of a professional and experience commercial (not residential) real estate broker, as well as an experienced real estate attorney, will help you to not only locate the best space, but also negotiate the best economic deal possible. A gross lease is the most traditional type of commercial lease. The tenant pays the rent and the landlord pays the real estate taxes, insurance and maintenance. These leases usually have escalation clauses to offset increased expenses. A net lease is a common type of commercial lease.  A net lease differs from the gross lease as the tenant, not the landlord, pays some of the expenses related to the space, such as the real estate taxes, insurance and/or maintenance. Other key clauses include the exact names of the parties (such as the correct name of your LLC or corporation, not your personal name); a premises clause that details the exact nature of the space being leased; exclusivity issues; and non-compete clauses; permissible improvements or alterations; security deposit; code compliance; assignment and sublease of the space (huge issue if you decide to sell your business); and many others, including renewal options, purchase options, destruction or condemnation clauses, landlord solvency, and zoning and land use restrictions. Let’s look at the scenario involved with the buying and selling of the business. If the business operating in the lease space becomes involved in a business purchase transaction, then the commercial lease may very well have a critical impact on the terms of such sale, or even whether or not the transaction closes. A buyer needs to evaluate the terms of the lease to determine remaining rent, the remaining terms of the lease and whether or not the lease can even be assigned. Many times, the landlord may have to consent to the assignment of the lease, which gives the landlord tremendous leverage (which is why you want to address this issues when negotiating your lease). Assignment may trigger new terms, such as additional security deposit and even a fee for the assignment. Sometimes, all renewal options are waived if a tenant sells their business, even if the landlord approves the assignment of the lease. Commercial leases are not ‘one size fits all.’ As discussed in this article, many provisions should be negotiated in the beginning. The guidance of experienced counsel to interpret this process is often critical. R. D. Adair, PLLC offers experienced business counsel and can assist you with your business lease issues. To learn more about commercial leases or how we may assist you in a related matter, contact us today to schedule a consultation.

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