The Lease Coach: January-February 2019
What makes a lease good or Bad?
Learning real estate law around starting a business is hard enough: Here are tips to help you recognize a lease that’s legit.
Yes, tenants, you can – and should – negotiate the terms of your lease. The problem is that many bakery tenants overlook the importance of their commercial lease and don’t know the difference between a “good” lease and a “bad” lease.
A bad lease agreement may hold you back from making a good profit, or even result in the closure of your business. Great bakeries in poor locations will never reach the full potential that a better location may offer. Perhaps, you’ve picked a great location but leased too many (or too few) square feet; this can be a problem as well.
Combine a mediocre location with a high rental rate and you have a recipe for disaster. Your bakery will never succeed, let alone sell for a profit. Many bakers shop for cheap space, but get what they pay for, location-wise. Not to downplay the need for skillful negotiation, but you don’t want to pay too much for a good location. In many of the large malls, the property may be recognized as an excellent location, but getting stuck in a quiet area of the property may render you nearly invisible.
Another factor can be a lack of adequate parking for your customers. One tenant The Lease Coach helped with a midterm rent reduction, came to the sad realization that their newest location was parking-starved. Just when people wanted to visit, the parking lot was already filled with vehicles. Potential customers stuck their heads in just to complain that they couldn’t find a parking space, then drove away.
A good lease will contain primary business terms, such as rent, size of location, and term length, that are essential to the completed lease deal but will only make up a small portion of the lease. The rest of the agreement contains hundreds of ancillary clauses that may or may not be financial in nature and are often written in the landlord’s favour. It’s a common mistake for bakery tenants to overlook terms, thinking they’re simply “standard.” Many of these terms can be adjusted to reduce potential negative impacts to your business or limitation on future rights.
Making a good lease great means removing, deleting, or negotiating restrictive clauses in the agreement that will hinder your company. For some tenants, the renewal-option clause can be the difference between whether you get a longerterm stay in your location allowing your business to grow. A demolition clause can force you to move out of your premises if the landlord wants to knock down the building to renovate. A poorly written relocation clause can force you into a costly move. If a baker wants to sell their business and assign their lease agreement to the buyer, the lease must have a comprehensive lease agreement clause. However, commercial landlords often include conditions controlling or prohibiting the lease assignment (unless wording is added for the tenant’s protection.) An exclusivity clause prevents your direct competitors or neighboring tenants from offering the same services or products. Review the hours and days of operation required in your lease; you may need to negotiate modified days or hours when it’s unprofitable to stay open. These are just some examples why it is important to read and negotiate all the terms of your lease before signing.
Brevity in a lease agreement is the enemy of most bakery tenants. A good lease agreement is long. Never assume that what the lease doesn’t say will be to your benefit later – it never is. As the tenant, you want everything that could possibly be an issue addressed in your lease agreement. Remember, it’s often what is missing from a lease agreement that really comes back to haunt you. If you plan to sell your bakery, try to think of whether you’d buy this business based on its current lease. As a prospective buyer, what parts of the agreement would you not like? Would the rent seem high? What about the operating costs (common area maintenance/CAM costs?) Would a shortage of parking or an undesirable neighbor drive away your potential customers and buyers of your business? Are there renewal options valid to a future buyer? Thinking about these issues beforehand can make all the difference in your decision-making process.
All of these are scary scenarios requiring proper guidance from a professional who is working for you, being paid by you, and serving your needs.
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