Commercial Leases for the Small Business Owner

By: Frederick W. Pfister

A commercial lease can have a major impact on your business, whether we are in the middle of a worldwide pandemic, or not. This is especially true in San Diego County, where the price of real estate, and commercial space, is at a premium.

A “good” lease can save you a substantial amount of money and protect your business; a “bad” lease can drain your business of resources and even cause your business to fail. Commercial real estate leases are an important part of any business and need to be reviewed with the care that you use to review any important part of your business. Commercial leases all have risks, but by understanding those risks you can make an educated decision on whether to lease the space, or not. Always consult an attorney before entering into a contractual agreement, including commercial leases. The following are several issues that are important to consider when entering into a small business commercial lease:

Define the “Premises”

It may seem a bit perplexing, but many commercial tenants do not have a clear understanding of the space they are actually renting. When that happens, problems arise and can often lead to disputes over the use of space within the premises, the parking lot, and common areas. In addition, many leases are priced (for both rent and common area expenses) based upon square footage. Specifically defining the space is therefore critical as part of the lease and the negotiations over the lease.

Define Operating Expenses

Operating expenses are not your business operating expenses, but the operating expenses of the landlord that are specified in your lease. These expenses typically include utilities, taxes, common area maintenance (CAM), and repairs costs. Make certain that you know exactly what is included in this category of expenses, and negotiate.

Escalation of Rent

An escalation clause is a fairly standard clause in a lease that allows rent to increase (or sometimes decrease) based upon certain conditions. If you do not think through these clauses and negotiate them, they can have a material impact on your future profitability. It is important to negotiate these before you sign the lease and try to cap your costs so that the lease costs do not spiral out of control.

"As Is" Delivery

While some commercial tenants will be able to obtain tenant improvements (or an allowance for tenant improvements), many commercial leases will state that the property is being acquired “as is”. What this means is that any existing problems or conditions (structural or otherwise) are the tenants’ responsibility to fix. A prospective commercial tenant should have a good idea of what that means, especially if they are thinking of leasing an older building. It is often prudent to have a professional perform an inspection of the property before you sign a lease and identify any issues that may come up. Many of these issues can and should be addressed with the commercial landlord before you sign the lease.

Co-Tenancy and Non-Compete Clauses

In many shopping centers, strip malls, or areas with multiple commercial businesses, you might have an “anchor tenant” that not only dominates the area, but can drive traffic to other related business. In these cases, you may be able to negotiate a co-tenancy clause that allows you to terminate or modify your lease if the anchor tenant vacates.

Just as important is the non-compete. A non-compete can be critical to avoid the scenario where the landlord installs a directly competing business in the same shopping center. Having a direct competitor can put you out of business, so it is important to negotiate an exclusion up front.

In short, always consider the neighboring businesses and whether they can hurt or benefit your business before you sign a small business commercial lease.

About Frederick W. Pfister

Fred Pfister is a partner of White and Bright and his legal practice focuses on commercial lease transactions. He received his Juris Doctor from the University of San Diego School of Law and his Bachelor of Science from Indiana University. To learn more about Mr. Pfister’s practice, or how White and Bright can assist you, your business or organization, please call him.