Know Your Lease

One of the most important assets of any business is its lease. As a business owner, it is critical that you know the essential terms, in particular when you must exercise any options to renew. Think about it. A person owns a successful restaurant business. How much is that restaurant worth if there is one year remaining on the lease? Now, how much is that restaurant worth if there are four years remaining on the lease, or seven or eight? It’s worth even more if there are, for example, two five-year options to renew. It’s important that you know and keep track of options to renew. These clauses frequently contain a deadline by which to exercise the renewal, for example, six months before the end of the lease. Many a business owner has been caught short when he or she advised the landlord late of a decision to stay. The landlord then threatens to not renew the lease. (Ask the landlord to extend the notice date if you need more time. A simple timely email, with a positive response from the landlord, even if it doesn’t comply with formal lease requirements to extend a deadline, can, at a minimum, greatly increase your bargaining strength and may even save the option completely.)

Now you, the business owner, are stuck. You will no longer benefit from the previously negotiated lease renewal rent (assuming it was favorable). You are now in a position where you have to negotiate with the landlord to stay, and the landlord has the stronger negotiating position. If the landlord refuses to renew, he will likely prevail in that dispute no matter how innocent a mistake it was to forget to renew timely. In this day and age of e-calendars that can look ahead many years – Google calendar, Outlook, iCal and numerous others – there is no reason not to track such dates, no matter how many years in the future the date may be. (The same applies to other important contracts, including key employee contracts, but that’s a topic for a later post.)

Commercial leases vary widely in form and content and the business executive reading his or her lease may be mystified by many of the terms. However, the essential terms that matter to the business executive - rent, utilities, insurance, common charges, and options to renew – are usually easily located and written in plain English. When you sign a lease, scan it. This makes it easy to retrieve or reference. (Of course, you should save the original too.) Make a brief abstract containing the essential terms – it can be as informal as a hand-written single side of paper. Put it on top of the lease when you make the scan. When you call it up on your computer, it will always be the first thing you see. Use your calendar system to docket critical dates, such as options to renew. Set reminders well in advance.

No matter when your option to renew is due to be exercised, set a separate reminder well in advance of that date to evaluate whether you are staying or leaving at the end of the lease. Even a small, service oriented business that needs only 2,000 – 3,000 square feet generally needs six to nine months to move in an orderly manner. Larger businesses, businesses that have equipment, inventory and some sort of operations, can easily need more than a year to move. If you a operating a business that is larger than a small business, you should begin evaluating your lease-end options 18 months to two-years before the end of your lease or the time to exercise the option. There is perhaps no bigger interruption for a business than moving. So in short, know your lease.