Even in a vacuum, starting a small business in Michigan is a lot of work. But dotting your company’s i’s and crossing the entity’s t’s is only one part of it. Many small business owners also need somewhere to operate. For that, they find commercial space and sign a lease.
As a small business owner, you want to avoid agreeing to something that may cause problems down the line. Here are some questions you may want to consider when reviewing a lease for a commercial space.
How am I allowed to use the space?
Most commercial leases have a section about permitted uses. These are terms dictating exactly how you, the tenant, can use the space. These permitted uses can get quite specific, and in some circumstances, may become problematic down the line.
Say you have a lease that permits bike sales. Six months down the line, if you decide you also want to set up a repair service in one area of the space, does the lease allow for it?
Is the landlord requesting a personal guarantee?
A personal guarantee is a method some landlords use to minimize the risk on their end, particularly with new companies. Essentially, if the business goes belly-up and you, the tenant, default on the lease, you guarantee you will pay everything off – even with your own personal assets, if necessary. That means your savings or home could end up settling the debt.
Whether you feel this is acceptable or not is up to you, but it is absolutely vital to know if it exists as part of the lease agreement.
Will the rent change? And how?
Some landlords like to add automatic rent increases in a lease. If this is the case, you may want to make sure it clearly states:
- What will cause the increase
- Whether the rent increase is a predetermined amount or calculated based on something else, such as an economic measurement
- Whether there is a cap to the rent hike
You don’t want to get caught in a situation where the landlord has free reign to increase rent at any time, by any amount.
What happens if I need to exit the lease early?
Having a predictable exit plan can be important. It doesn’t have to be because of a bad reason. Sometimes a successful business needs to expand faster than anticipated, requiring a new space.
Many commercial leases contain early outs, so make sure you are familiar with the terms – and that they seem fair. In some cases, a lease might allow the tenant to sublet in order to remain compliant. Having this option can be beneficial.