How to avoid the pitfalls of commercial leasing

Choosing the right location is crucial to your business development. The right location depends on a number of factors, including your line of business and proximity to customers and employees. You face another choice as well: whether to lease, buy or build your place of business. Each option has its pros and cons.

For many businesses, the answer is clear. Others need to weigh the pros and cons based on their specific circumstances. If you've decided to lease, here's what you should know before you sign your commercial lease.

Pros of leasing

• For small businesses and start-ups, leasing means not having to earmark large amounts of capital for the place of business. This cash can instead be put toward growing the business.
• As a tenant you get turnkey service. A good lease spells out the terms and conditions of the arrangement, so there usually aren't any unpleasant surprises in terms of maintenance and repairs.
• Costs are fixed for the term of the lease or are at least set out clearly.

Cons of leasing

• The premises are not always ideally suited to the business's needs, and your landlord may not necessarily be receptive to change requests.
• When your lease runs out, your rent may, and probably will, go up.
• You won't necessarily be the only tenant in the building, which means you may have problems with neighbours or parking.
• The money you spend on rent is lost and does not help pay down the purchase of the property.
• You may have to pay a higher rent to get a good landlord.

5 tips for negotiating a good commercial lease

• Don't negotiate a prior agreement. Sometimes landlords offer a temporary agreement or basis for negotiation, which is not the official lease. But beware, the terms of a preliminary agreement are not carved in stone, and the landlord could later change the terms to double the price per square foot, for instance.
• Curb your enthusiasm. Even if it's love at first sight, don't sign on the dotted line just yet. Keep in mind that even if you like it, the location must first and foremost meet your business's needs. If you are visibly enthusiastic, the landlord may ask for more rent.
• Determine your fixed costs. When entrepreneurs sign their first lease, they usually only think about the rent. It is important to estimate what your total fixed costs will be, including electricity, heat, Internet, phone and insurance. You may have to revise your monthly estimate.
• Take your time. You don't have to accept the lease as-is. Don't rush it. Take time to understand your lease. Read it carefully by yourself, then with your team of professionals (lawyer, accountant, leasing consultant, building inspector, etc.). Be ready to negotiate and don't hesitate to reject some terms. Always get decisions and changes in writing, as a verbal agreement may not hold up in court.
• Do your due diligence. It's always best to do your due diligence before buying or leasing a property: inspection, legal titles, applicable municipal tax accounts, etc. Doing your due diligence means researching the landlord as well. Talk to other tenants to find out a little more about the landlord and see if there are any pending lawsuits against him or her on the Société québécoise d'information juridique website. Don't leave anything to chance. What you learn will serve you well during lease negotiations and may prevent problems down the road.

Due diligence checklist

Titles

• Does the landlord actually own the building?
• Who signs the lease? An intermediary or the landlord?
• Have the municipal taxes been paid?
• Who are the creditors?

Inspection

• Is the building in good condition?
• Have you inspected the roof? The foundation? The heating and cooling system?
• Is there asbestos in the walls, ceilings, floors or appurtenances?
• Is the ground contaminated?

Zoning and other legalities

• Is the property zoned for your type of business?
• Will your neighbours' activities affect your business?
• Are there any noise, access or emissions restrictions (e.g., no noise after 11 p.m.)?
• Is the building up to code (safety, accessibility, etc.)?
• If you are a retail business, are you in compliance with the shopping centre and street ordinances (signage, intended use, etc.)?

General

• Who is the landlord?
• Does the landlord have a reputation for honouring his or her commitments?
• Is the landlord solvent? Does he or she have the means to pay for building repairs and general maintenance?
• Is the landlord capable of providing the services set out in the lease?

Choosing the right location is crucial for your business. Though legal action can often be taken against a landlord, it's always best to take the necessary precautions to save yourself the hassle. Don't hesitate to contact your lawyer to have him or her look over the lease for you and identify any grounds for negotiation you may not have thought of. It's an expense that could save you a lot of money! And as a business manager, you surely have better things to do than go to court.