Inspectors and Commercial Leases

by Nick Gromicko, CMI® and Kate Tarasenko

 

 

Don’t sign on the dotted line for your commercial rental space before reviewing your lease carefully, preferably with the assistance of an attorney and a commercial property broker.  In addition to the type of lease, the rent amount and the length of occupancy, some considerations and terms you encounter in your commercial lease may include the following:

• Since you have probably already incorporated your inspection business to avoid personal liability (following InterNACHI’s advice in previous articles), make sure your company name is listed on the lease agreement as the lessee, and not your own name.
  
  
• Similarly, avoid any request for personal guarantees in the lease agreement, as they can place both your personal and business assets at risk. 
  
  
• Never underestimate the potential for misunderstandings, especially in legal matters.  A case in point is defining the premises of the rental property.  Your friendly prospective landlord may have proudly taken you on a tour of a spacious building with many amenities, such as a large parking area, a lobby, a kitchen and restroom facilities -- but which of them actually constitute the premises which are subject to your lease agreement?  They must be spelled out, especially if there are neighboring tenants who will share some of these areas.  
  
  
• A use clause stipulates the specific space of the property that is subject to the lease agreement, and any surrounding area that is off-limits to the renter.  The use clause may also stipulate what kind of activities may and may not be conducted in the rental space, such as activities which produce a lot of fumes or noise.  Depending on where the property is located – zoned commercial or mixed-use – the property itself may seem ideal, but your ability to conduct business properly may be inhibited based on location and/or use limitations.  Make sure that you and your landlord are in agreement about what kinds of activities will be conducted – and where – on the property, both during and outside of business hours. Also, try to keep the use clause as broad as possible. Realize that your plans may change as your company grows and you may require flexibility to use your space for purposes that could not have been anticipated.
  
  
• If your prospective landlord leases to several tenants in one area (such as in an industrial park or strip mall), you may want to ask for an exclusivity clause.  This will prevent the landlord from renting to competing businesses in proximity to your own.  This clause is added primarily for retail renters, but many inspectors engage in side-businesses which may make such a stipulation worthwhile.   
  
  
• Especially if the premises are part of a larger rental property, the renter should know when and under what circumstances the landlord may have access to their property.  
  
  
• Consider the lease length. A long-term lease can limit rent increases and give your business long-term stability, while a short-term lease allows you the flexibility to move sooner if you dislike the location. There are usually ways to break a lease, but you should not go into a lease agreement with the intention of breaking the lease. 
  
  
• The renter should find out whether there is a security system in place, and what his responsibilities and rights are.  For example, is he responsible for setting an alarm, or alerting a security officer?  If so, under what circumstances?  Are there fees for calls to secure the premises, or for false alarms?  Also, if no security system or plan is in place, the renter may want to install or hire one, and these additions should be subject to negotiation, as well as added, using specific language, to the lease agreement.  
  
  
• A landlord may insist on annual rent increases based on the percentage increase of the Consumer Price Index (CPI). If such a request is made, you should try to arrange that the CPI does not kick in for at least two years. Also, try to arrange an upper limit on the amount of each year’s increase.   
  
  
• Some leases require the tenant to obtain permission from the landlord before making improvements or alterations to the premises. These provisions are typically too restrictive and you should attempt to negotiate the terms. For example, try to get the right to make non-structural alterations or improvements that cost less than $2,500 without the landlord’s consent.

In summary, you should familiarize yourself with lease terms that affect typical commercial businesses (as well as your specific enterprise), and what the short-term and long-term ramifications are for your various options.