If your business doesn’t need a physical space, skip ahead to the next section of ATB’s Startup Guide.
Maybe your funky crafting business has outgrown your kitchen table or you have a line out the door at your artisanal pizza pop-up, with no place for customers to sit. Maybe you need to find a new location with more foot traffic to sell your antique musical instruments—even just temporarily—to learn more about the market.
Whether you need a physical space for a storefront, office, coworking spot, manufacturing or warehouse, find a suitable location by doing your research and talking to the right people.
Enter, the commercial lease
A commercial lease avoids tying up capital in real estate—a great opportunity for startups.
But signing a lease for your business is different from signing one for your home. Commercial leases have less protection and different rules than residential ones, so understanding what your contract covers is crucial.
For example, you move into a new apartment, and suddenly the dishwasher breaks and your plumbing is out of commission. You call your landlord, and they get it fixed.
This isn’t the case for commercial leases, and you as the business owner may be the one responsible for any necessary repairs. Some commercial leases cover utilities, property taxes, insurance, maintenance, repairs and common area expenses (like snow removal, janitorial services, landscaping or lawn mowing), but others don’t.
Lease types: know your responsibilities
The type of lease you choose depends on your business’ needs, budget, location and goals.
- Net (single/double/triple): the tenant pays rent and a combination of some or all incidentals like property taxes, insurance and maintenance.
- Gross/full-service: the tenant only pays rent while the landlord covers all other incidentals.
- Percentage: the tenant pays a predetermined base rent plus a percentage of any revenue made while on that rental property.
As the business owner, you need to know your lease responsibilities to avoid penalties and other unexpected costs. For example, you might sign a single net lease thinking everything is included but later learn that snow removal isn’t after the city fines you.
Lawyer Up
Your commercial lease should clearly define the:
- Rent price and payment terms
- Key contact people from property management and business
- Property description/use and who has access to it, including any exceptions
- Duration and termination/renewal conditions
- Maintenance, repairs and utilities (including process and who covers any expenses)
- Insurance requirements
- Rent increases
- Security deposit and conditions for return
- Rules for subleasing (you keep the lease and rent space to a new tenant) or assigning (you leave the lease and transfer it to a new tenant)
- Dispute resolution process (for things like damage or late payments)
Always have your commercial lawyer scrutinize the lease contract so there are no unfamiliar terms or hidden fees that could affect your busiuness' future. Never assume—take the time to understand exactly what you’re paying for now to avoid surprises later.
Doing the research
- Understand your needs and research the market, landlord, building owner, location and applicable laws, including zoning, nuisance and environment laws.
- What are the neighbours and building traffic like? Talk to a commercial real estate agent to narrow down your property search and current tenants about your potential landlord and their financial situation. Search public records for any insights.
- Confirm if your type of business is allowed to operate in that area. Research your municipality’s land use bylaws—if you have multiple locations in different cities, stay up to date on each locale’s laws.
- To expand your coverage understanding, meet with an insurance broker.
- Find out your obligations to the rest of the building and if you’re allowed to renovate.
- Ensure you know how much rent increases will be each year. Some landlords might even add a clause about inflation so they can raise rent to deal with operating costs.
- Property taxes change year to year, can almost triple or quadruple and are out of a landlord's control. Be prepared for how drastically the amount can change.
- Have contingency in cash flow for unexpected costs that might pop up, like repairs.
- Commercial leases typically last several years, but you may want to ask about the possibility of a shorter-term contract. Short-term leases may cost a bit more but offer the flexibility your business may need in its early years.
Negotiation ideas
Make sure the lease suits you and your business. Don’t sign anything until you’ve taken time to review and possibly negotiate each clause. Leases are legally binding and aren’t one size fits all.
If a landlord is firm on the price, you could ask for incentives, like a tenant improvement allowance, a cap on rent increases, a free month of rent or a competitor clause. For example, you could ask that your business be the only bakery in the building to protect your profit and reduce your competition.
Ask your lawyer about negotiating personal exposure (what you personally pay if your business can’t pay), holdover rent (paying extra rent if you stay past the end of your lease) and a nondisturbance agreement (if your landlord can’t pay their mortgage, your business can stay).
Conclusion: the correct conversations
There are a lot of conversations to have and considerations to make before you sign a lease.
When you’re equipped with expert guidance, you’re several significant steps closer to finding a space that fits your business’ needs. To get there, talk to:
- A real estate agent to gather information and search for properties.
- People in your potential location (to learn what the clientele and foot traffic are like).
- An insurance broker about what kind of coverage (like loss, liability and interruption) you need.
- A lawyer about every lease condition. If you can only afford one expert during the leasing process, choose the lawyer. You need to know if your contract covers everything or if you’re on the hook for taxes, insurance and maintenance. You also need to know if your type of business can operate in a particular space, what specific responsibilities you have and what local laws to follow.
Be on the safe side—make no assumptions about how you move into, operate, change or move out of the space. Connect with the right people throughout this process so you’re protected and know what you’re signing up for.
Next, learn how to create an efficient and organized filing system for your business.