Signing a commercial lease is a significant commitment. It is important to fully understand the terms to avoid making a poor investment.
Certain terms in a lease agreement can indicate potential problems. These items deserve careful attention and consideration before finalizing the transaction.
No lease-breaking options
One major red flag is a long-term lease with no escape clause. A lease that binds the tenant for many years without an option to break the lease can be risky. If the business does not perform as expected, you may face significant financial losses. An escape clause provides flexibility and reduces the risk.
Large rent increases
Another concerning term involves excessive rent escalations. Some leases include clauses that increase rent annually or periodically. While small increases are normal, large or frequent hikes can make the space unaffordable. Statistics show that the average asking rate for office space in suburban Maryland is $32 per square foot. This figure can be a good touchstone for determining if your commercial lease is a reasonable long-term investment.
Unusual hidden costs
Hidden costs can certainly signal a poor investment. These costs include maintenance fees, property taxes and insurance obligations that the landlord is not forthcoming about. A lease that passes these costs entirely to the tenant can become very expensive. It is important to know all potential costs before signing the lease.
Unfavorable exclusivity clauses
Exclusive use clauses can limit business opportunities. These clauses restrict the tenant from operating certain types of businesses or selling specific products. While these clauses protect existing tenants, they can also stifle growth. Think carefully about your future business goals to determine if the lease will overly restrict business operations.
Reviewing a commercial lease carefully is a necessity, and it may even take more than one set of eyes to find any and all unfavorable terms. By identifying these red flags, you can avoid costly mistakes and ensure a more secure business future.