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Business Law: Office Space – What to Know Before Signing on the
Dotted Line
By Nina L. Kaufman, Esq
Naomi’s t-shirt business, Chic Couture, has blossomed, and her
inventory has outgrown all possible nooks and crannies in her studio
apartment. Ned writes website copy for corporate clients, and, with
gym socks all over the floor, there’s no way he want to meet with
them in his studio apartment. Noreen wants to start a dance studio,
and because of zoning laws (not to mention physical space), she’d
never even dream of holding classes in her studio apartment.
For all of these reasons, all of these business owners have a need
for office space outside of their homes. And signing a commercial
lease can be a nerve-wracking proposition, as a lease is often your
the largest single monthly expense that a business needs to pay each
month. And don’t get me started about the possible personal
financial risks.
So before exposing your company (and possibly yourself) to a parade
of horribles, ask yourself the following questions:
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What kind of space do I really need? Ned needs space for
the sake of appearances. As a result, he might not even need an
office to occupy full-time, but more of a conference room or
temporary office space. There are business centers (also called
“executive suites,” or “virtual offices”) cropping up all over
the country that can provide that kind of service. For a small
monthly fee (far less than renting raw space and renovating it
yourself with amenities), you can have a receptionist to answer
(and forward) your calls, plus access to meeting rooms on an
as-needed basis.
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How long do I need it for? It’s tempting to take a
longer-term lease in order to lock in lower rate increases. But
if the economic climate changes and your business slows down,
you could be stuck with a large monthly expense that’s difficult
to get out of. Noreen was optimistic about her chances for
success, but recognized that her company didn’t yet have a
financial track record. And, as a newlywed, saw that she wanted
to have children at some point within the 10-year lease term
that her landlord was proposing. Not knowing where her financial
fortunes – or personal priorities -- might lie, she opted for a
space with a shorter term.
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Is the landlord requiring a personal guaranty? Landlords
often ask for a personal guaranty from a business owner . . .
and may refuse to rent the space without one. When you sign a
personal guaranty, it means that you, personally, will make good
on the lease payments, even if the company can’t. This is a huge
risk for small business owners like Naomi, where the company
provides her sole source of income: if the business cannot make
enough money to meet its expenses, it is unlikely that Naomi
herself will be able to make the payments in its place. As a
result, the only escape may be to file for personal bankruptcy
protection.
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How much is the rent . . . really? You may have budgeted
for the basic rent, only to find yourself subject to a host of
additional charges . . . which the landlord calls “additional
rent” and treats the payment of which as seriously as the basic
rent itself. Items usually lumped in as Additional rent can
include real estate taxes and charges for water (hot or
otherwise), sewer, gas, steam, electricity, light, heat, power,
and services supplied to your leased space . . . and a
proportion of maintenance costs for common areas. Make sure you
read the lease carefully to see if it covers these kinds of
charges (for places like business centers, though, they tend not
to arise) and, if so, get estimates on how much they can run.
That’s your real monthly rent payment.
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What else am I responsible for? Especially when leasing
storefront property, as Noreen wants to do with her dance
studio, maintenance and repairs can add significantly to your
monthly nut. Office leases can require that the tenant who
occupies the street level must remove snow and ice, other
obstructions or debris, and clean dirt (even graffiti!) in front
of or on the premises. If you don't do so, the landlord may, and
will bill you. You may also be responsible for maintaining
sprinkler systems, repairing air-conditioning and heating units,
handling repairs (that do not affect the structure of the
building), and removing garbage from the premises. These also
need to be factored into your costs.
Conclusion
Negotiating the terms of a lease involves more than just knowing
what space you want and how much the rent will cost your business.
There are a number of hidden costs and factors that can escalate the
rent over and above what you originally budgeted to pay each month.
If the landlord presents you with a "take it or leave it"
proposition, be sure you can financially absorb the risks that lurk
within the lease. If not, you may be better served by avoiding those
Lucifers altogether and looking for other space.
Leases are a particular kind of contract. So always be sure to have
the lease reviewed by a lawyer, even if it’s a short one that you
think you can handle. As with other contracts, a lawyer can spot
what’s missing that could come back to haunt you. Unlike the old
adage, what you don’t know could hurt you if you don’t know the
questions to ask.
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© 2004-2009 The Legal Edge LLC. Nina L.
Kaufman, Esq. is an award-winning business attorney, author,
and speaker. Under her Ask The Business Lawyer umbrella,
Nina offers easy-to-understand business law resources that
protect small businesses and save them money. To learn more,
and receive our FREE "LexAppeal" ezine, visit
http://www.GreatBusinessLawTips.com or contact
Contact Us. This article is for your
general information only. Be sure to consult with an
attorney regarding your particular situation to make sure
you get the specific advice you need.
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Nina Kaufman, Esq.
Award Winning Business Lawyer, Author & Speaker |
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