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Commercial Leases: Avoid Getting Screwed

I’ll be the first to admit the title to this blog article is a bit raw or aggressive. I considered something subtler, like “Commercial Leases – Small Businesses Beware” or “Don’t Get Bitten by a Bad Commercial Lease.”  However, the fact of the matter is, many small businesses are absolutely taken to the cleaners by unscrupulous and/or uncaring landlords who’s only care is collecting rent, regardless of whether their actions make it impossible for their business tenants to attract, keep or maintain customers.

In New Mexico, we’ve been in our Monsoon Season for over two months.  It has been a wet couple of months, more so than usual.  Most of New Mexico is a desert, usually very dry and parched, and favors “flat-roof” architecture.  This makes for a recipe where roofs develop undetected leaks that seem fine for almost a year – until the monsoon season hits.

Good Landlords, Bad Landlords

Monsoon season in New Mexico fosters what I call a crucible moment that separates the good landlords from the bad. The good landlords have roofs with few leaks, because they are on top of maintenance and don’t let their roofs go un-inspected well past their lifespans. The good landlords fix leaks quickly without hassle, nagging or complaints, using professional contractors who are experienced, insured and bonded.

Good landlords take responsibility for the plight of their tenants.

The bad landlords, however … The bad landlords have very leaky roofs, because they don’t pay for regular maintenance and seldom conduct inspections.  The bad landlords send Guido over to “look” at any leaks, if you’re lucky enough to have your landlord even address your complaint.  The bad landlords could care less what sort of damage occurs because of a leak, and will not take responsibility for damages even if you warn them and even if they take months to fix potential leaks.  Many of the bad landlords have facilities with black mold, although you won’t know it because they send Guido over to brush-off the black mold and cover it up with plaster, drywall or carpet, once they manage to evict the previous tenant for complaining about the same black mold.

I could go on and on about the bad landlords (or poor property managers).  In 2013 alone, I have had the unfortunate experience listening to more than one sobbing client complain about how their landlords have ruined their business.  It’s truly heart wrenching to listen to a sobbing client talk about how their life-savings is going down the drain, and their landlords could care less.

The problem for the small business, is that a commercial lease is not regulated the same way as a residential lease.  In all states, residential leases are governed by various state statutes and local ordinances, to prevent unscrupulous landlords from preying on unwary tenants.  In New Mexico, as is with most states in the US, it is assumed a “business owner” is sophisticated, who hire attorneys to negotiate their lease.  Here, the law assumes the small business owner is more analogous to Wal-Mart than an individual; which is a joke of course.  A small business owner is almost exactly like an individual, and nowhere close to a Wal-Mart.

Let me be clear:  If you have a commercial lease, you have NO protections against an unscrupulous landlord or property manager except for what is expressly stated in the lease (in most situations).

So, how does a small business owner protect against a bad landlord??!?  By negotiating a fair lease that protects your interests, and at the very least, gives you options or recourse if the landlord doesn’t perform as expected – at the beginning of the relationship.  This requires you to define what is expected, as well as negotiate your options.

Get it right, right at the get-go

Like an interview, the landlord is at their best behavior when you first meet them.  Once you’re in, you’re stuck – usually with a personal guarantee – for years (usually).  Therefore, your greatest bargaining position is right now, before you sign the lease and before you commit your business.

Resist the temptation to fall in love with one place.  Have at least two, ideally three, options available and negotiate with all the parties not just on price, but make it clear you care about lease terms and that you will be negotiating the lease.

Don’t fall for the typical pressures to get you to sign right away.  You will be told one or more others are really looking at the place.  You will be told that you “better hurry,” or an incentive may be dangled to save some money if you sign by a certain date.

It is said the value of a used car is directly proportional to the value of the mechanic who inspects it.  The same can be said for the premises you are considering.  You MUST inspect it properly, and you would be well-served to hire a professional to do so.  Remember that if you’re looking at a place in April, the monsoons don’t come until late June.  If you’re in the Northern US, remember that snow melts in the spring.  The bad landlords will paint over leak stains and plaster over black mold.  Simply walking through the place doesn’t tell you if the pipes are in good order, or whether the HVAC is about to explode with a $25,000 repair or replacement requirement for whomever the unlucky tenant happens to be.

Once you sign, you are committed.  Period.  Most landlords won’t entertain renegotiating a lease, even at the end of a lease term (unless the overall premises is seriously underutilized). Landlords know you have significant expenses and impacts to your business if you relocate.  You may lose customers.  You have to redo business cards, letterhead, contracts, etc, to move.  Landlords will take advantage of this, and dig-in their heels when it comes time to renegotiating a lease at the end of its term.

Get your lease right from the get-go. Take the time to negotiate properly, before committing, and hire a professional to inspect the premises.

A good place is like a 3-legged stool

I tell my clients to focus on three factors when considering a location to rent for their small business:

Location  –  Does the facility have the right traffic for the right customer demographic?  Is there enough parking?  Is it easy to get to for your customers?  Does it have the right compatible businesses in the area, and are competitors non-existent (ideally) or underserved at the least?  Is there room to grow, if you think your business will need a larger facility?  Did a qualified professional inspect the premises and give it a thumbs-up?

Rent  –  Is the cost per square foot competitive for the market and area?  Can you afford it?  Is there a rev-share component, and does it make sense given your business?

Lease Terms  –  Is the lease fair?  Does it clearly spell out the expectations of the parties?  Are you in control of your own destiny or at the whims of the landlord?  Do you have reasonable recourse in cases of breach?  (I wrote another blog article entitled, Negotiating a Good Lease, which details some of the lease terms to think about).

Like a 3-legged stool, if one or more of the legs is missing, it cannot stand.  It’s the same for the premises you are considering to lease for your small business.  Don’t take your eyes off any of the three factors or get distracted by one of the legs that seem like quite a deal.

For example, great lease terms and a very low rent simply won’t make up for a poor location.  Likewise, a great location and lease terms won’t make up for exorbitantly high rent.

Hopefully, if you follow some of the guidelines in this blog article, you will have some level of protections against the bad landlord, and more importantly, I wish you and your business the greatest of success and I pray your landlord (and/or property managers) is one of the good ones.

With L4SB’s flat-rate contract review of $20/page, an attorney can review your lease quickly and cost-effectively.  It just doesn’t make sense to gamble with such a large investment, without utilizing the services of an attorney.

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