Signing a commercial lease can be one of the most significant commitments a Michigan business makes. Whether you’re opening a storefront, leasing office space, or moving into a warehouse, the agreement may determine your occupancy costs and responsibilities for years.
Commercial leases also offer business tenants fewer built-in protections than residential leases. Many important issues are determined primarily by the language of the contract. Before signing, it is therefore important to understand not only the monthly rent but also expenses, renewal rights, maintenance obligations, default provisions, and what happens if your business needs change.
Start With the Lease Term and Renewal Options
A longer lease can provide stability, but it can also lock your business into a space that no longer works. Consider how the lease term fits with your company’s expected growth, financing, and long-term plans.
Pay particular attention to renewal options. The lease should explain how and when you must exercise an option, how rent will be determined during the renewal period, and whether any conditions could cause you to lose the right to renew.
Missing a notice deadline could potentially mean losing a valuable renewal right.
Understand the True Cost of the Lease
The advertised base rent may represent only a portion of what your business actually pays.
Depending on the lease structure, a tenant could also be responsible for expenses such as property taxes, insurance, utilities, common-area maintenance (CAM), repairs, and other operating costs. This is particularly important with triple-net leases, where significant property expenses may be passed through to the tenant.
Before signing, determine exactly which expenses are included in rent, which are additional, and whether there are limits on how much certain charges can increase.
Who Is Responsible for Repairs and Maintenance?
Never assume that the landlord is responsible for maintaining everything outside your individual site.
A commercial lease may assign the tenant responsibility for substantial repairs or maintenance. Depending on the agreement, this could include HVAC systems, plumbing, electrical systems, windows, doors, parking areas, or even certain structural components.
A few questions worth answering before singing include:
- Who repairs or replaces the HVAC system?
- Who is responsible for the roof and structural components
- Who handles snow and ice removal?
- Who pays for plumbing or electrical problems?
- What happens if a major system fails shortly after move-in?
These obligations can turn what would normally be an affordable lease into an expensive one.
Make Sure the Permitted Use Fits Your Business
Commercial leases commonly include a use clause specifying what activities are permitted on the property. Make sure the provision is broad enough to accommodate both your current operations and reasonable future changes.
You should also investigate whether local zoning and other governmental requirements allow your intended use. A landlord agreeing to lease you a space does not necessarily guarantee that your particular business can legally operate there.
If renovations, signage, special licensing, or permits are necessary, the lease should address what happens if required approvals cannot be obtained.
Review Personal Guarantee Requirements Carefully
Landlords typically ask owners of smaller or newer businesses to personally guarantee commercial lease obligations.
A personal guarantee can significantly change your financial exposure. If the business cannot pay rent or defaults on the lease, the landlord may potentially pursue the individual guarantor rather than being limited to the business entity’s assets.
Before signing, understand whether the guarantee applies to the entire lease term, renewals, additional charges, and other obligations. Depending on the transaction, it may be possible to negotiate a limited or declining guarantee.
Why Legal Guidance Matters
A commercial lease can create substantial obligations lasting several years, and unfavorable provisions may not become obvious until a dispute or expensive repair arises. Having an attorney review the agreement beforehand can help identify risks and clarify provisions that might otherwise be overlooked.
Working with Duff Law can help Michigan business owners evaluate proposed lease terms, negotiate provisions, and understand the legal and financial obligations they are accepting before committing to commercial space.