Commercial Tenant Lease Rights

            More and more small businesses are springing up. The businesses usually need to lease space. Existing businesses need to continue leasing. Commercial tenants are at a huge disadvantage and are at the Landlord’s mercy if the Tenants do not know their rights and options in negotiating a new lease or the terms of a lease extension.

            Entity and Guarantee: A lease is a contract as well as a conveyance of the right to occupy a leased space (the “Premises”). The Tenant should not be the individual. The individual or individuals owning the business should create a corporation, limited liability company or other entity to be the Tenant. The individual business owner should consult an attorney or accounting consultant (preferably a CPA) as to which type of entity to use. The purpose of having an entity as the Tenant is to prevent the individual from having personal liability for personal injury at the Premises, personal liability for business obligations, and personal liability for failure of the business to pay the lease rent and other financial obligations of the lease.

            Landlords typically require a personal guarantee for the lease rent and other financial obligations of the lease. By giving a personal guarantee, the individual gives up the protection and purpose of the corporate entity which was formed to be the Tenant. Do not agree to a personal guarantee.

            If you just need to have a location where the personal guarantee is a deal breaker, at least try to limit the personal guarantee. Try to limit the dollar amount of the guarantee, or try to limit the term of the guarantee. For example, if the term of the lease is five years, try to limit the guarantee to one year, or the equivalent of one year’s rent.

            Term:   Many business owners overlook the potential value of their business. Most business owners are focused on creating recurring income to support themselves. But, the real potential income is selling the business. Businesses are valued on the stream of income the business generates. For example, if a business generates $25,000.00 after all expenses, and the market for that type of business will attract buyers wanting a 15% return on their investment, then the business could be worth $166,667.

            If you want to preserve your ability to sell the business, the business needs to have the right to continue to occupy the Premises after the initial lease term. The lease should provide that the Tenant has the right or option to extend the lease term. The rent for the option term should be established in the initial lease, and not left to be determined later. The Tenant’s guarantee should not be extended into the option term, and should terminate if the business is sold. The Landlord reasonably can condition the assignment of the lease on obtaining a substitute guarantee from the individual(s) who own the entity buying the business and assuming the lease obligations.

            Other considerations:  Commercial leases typically are quite lengthy. To the untrained eye, it becomes a blur and confusing to read. In the budget for all businesses, there should be a line item for professional fees, such as legal and accounting. You can save a professional fee now, and pay dearly much more when a problem arises after you have signed a lease. An attorney experienced in these matters vastly increases the chances that the problem is detected and avoided in advance.  

                                                                                                                                                                                               

Michael S. Price, Esq. is a Florida Supreme Court Certified Circuit Civil Mediator, located at 1616 Jork Rd., Suite 102, Jacksonville, FL 32207; telephone (904) 396-4445; e-mail mprice@michaelpricelaw.com. Mr. Price focuses on tenant rights, leases, real estate, contracts, divorce, criminal law, and mediating disputes related to construction, leasing, foreclosure, property defects, binder deposits, probate, family owned property and disputes related to business, partnerships and shareholders.