If you’ve been following proceedings at the Supreme Court last week, you know that the centerpiece of the Obama Administration’s domestic agenda is hanging on four little words in section 36B of the Affordable Care Act (aka Obamacare). If nothing else, it should serve as a reminder to pay attention to the fine details.
During my four decades of experience in commercial real estate, I’ve seen many fortunes made and lost. Particularly in the area of retail leasing, often times the difference between disaster and a successful business can hinge on a single sentence in a 40- or 50-page lease document.
In order to avert disastrous outcomes, here are my top five suggestions for retail tenants when it comes to lease negotiations.
Research the owner.
A quick title search will reveal if you are in fact dealing with the right owner, if the property is in trouble with a pending foreclosure or somewhere in between. A few minutes spent Googling the owner will uncover a history of litigation or other potential landmines.
Mind your use.
The “use clause” in a lease spells out what you can do on the premises. An overly restrictive use clause limits your ability to alter your product or service offerings in the future. It might seem no big deal to see language like “for use as an ice cream parlor only” if you plan on opening up a scoop shop—but what if you want to expand to offer yogurt or smoothies down the road because your customers’ tastes shift?
Know your terms.
It’s critical to make sure you have a long enough lease between the prime term and options to be able to launch your new venture, recoup your upfront expenses of building out the space, gather a good customer base and still have time left to operate—and profit, ideally—for as long as possible. Don’t be afraid of market rate options. If your business is flourishing, you will be able to afford the rent. If the rent presents a problem, you need to reevaluate your business plan.
Assignment and sublet options.
Combined with a flexible use clause and an adequate length of lease, proper assignment and sublet language gives you the flexibility to sell or sublet your space if the right opportunity presents itself. There is no such thing as too many options when it comes to the direction and future of your business.
Get the right attorney.
The single most critical piece of advice I can offer to anyone is to use the right attorney. It puzzles me that most people recognize that every doctor in a hospital has a practice that is typically based around their specialization, yet for some reason still lump all lawyers in a generalized basket. Just as you wouldn’t want a neurosurgeon operating on your heart, as a business owner you don’t want to use the lawyer who wrote your will or did your divorce to review your lease. Retail leases are complex documents, and you want to engage an attorney who is highly experienced in the drafting and negotiating of commercial leases.
Obviously, there is a lot more to consider as a business owner opening a new location than just the five above tips for tenants, but by having these areas covered at a minimum, you will have taken significant steps toward ensuring that you have a lease that lets you have a flourishing business and a good night’s sleep.
Timothy King is co-founder and managing partner of CPEX.