Leasing a commercial property is a huge step for a business. The right space in the right location can attract ideal customers and take an entrepreneur’s business to the next level. The key to unlocking this business potential lies in a property’s lease. When a prospective commercial property seems to have everything perfectly in place, the potential tenant needs to be diligent about ensuring the lease is clear and fair before signing on the dotted line.
For entrepreneurs new to commercial property or those looking to make a location change, knowing what warning signs to look out for beforehand can save on time, effort and money. Below, a panel of Forbes Real Estate Council members shared common red flags to watch out for when signing a lease for a commercial real estate property.
Forbes Real Estate Council members share lease warning signs potential commercial property tenants need to be on the look out for.
Photos courtesy of the individual members.
1. Landlord Financial Struggles
Before signing a commercial lease, look closely for any signs that your landlord is struggling financially. Common red flags include an uncared for property, multiple unoccupied areas within a complex and/or tenants that have a troubling track record of not making payments. If your landlord is over-eager to give into your terms, that’s another indicator they may not be in good financial standing. – Marc Betesh, Visual Lease
2. No Non-Disturbance Clause
Many landlords are offering amazing terms to prospective tenants, but if their lenders foreclose on the property, the lease could be nullified. It is very hard to judge a landlord’s financial health from a lease negotiation. So, tenant reps should insist on non-disturbance clauses in their leases which will protect the tenant should the property go into foreclosure. – Craig Romm, HelmsleySpear
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3. Lack Of Clarity On Charges
Commercial tenants must understand net charges and their rights if a landlord defaults. Net charges are additional rent. The items that tenants will be directly charged for should be listed and tenants should have the right to an annual audit of those charges written into the lease. Tenants need to do that work annually. They also need protections if landlords don’t perform repairs and maintenance. – Kristin Geenty, The Geenty Group, Realtors
4. Vague Delivery Condition, Maintenance And Repair Terms
Examine delivery condition, maintenance and repairs clauses. Confirm that all of the major systems such as electrical, plumbing, HVAC and fire safety are all to code and functional. Check if routine maintenance and repairs have been done and who is responsible for what. If it is a NNN lease, request that the landlord warranty these systems for the first one to six months so you aren’t inheriting a problem. – Catherine Kuo, Elite Homes | Christie’s International Real Estate
5. Unclear Obligations
You should make sure you understand the obligations you are taking on before you sign. Are there net lease charges in the lease? When are these types of charges due? Will any property tax flow through in the event of a sale to you on a gross lease? All leases are not the same, so seek out proper legal counsel before you execute any lease document. – Michael J. Polk, Polk Properties / Matrix Properties
6. Ambiguity
Any commercial lease will likely require professional assistance. Even if the terms are quite clear and all documents seem to be in order, have an attorney review each clause—keeping an eye out for ambiguous explanations or inaccurate numbers. This should help to prevent misunderstandings down the line. – Joseph Edgar, TenantCloud
7. An Unsuitable Holdover Clause
There are many elements to a well-negotiated lease, but one of them is a well-negotiated holdover clause. Over 60% of tenants hold over at least one month after the expiration date of the lease. Ensuring that you have a well-negotiated clause that is not a dramatic increase over your last month’s rent amount will help you manage costs as you relocate and ensure the landlord doesn’t have undue leverage over you. – Jonathan Keyser, Keyser
8. High Turnover Rates
The high turnover rate of previous tenants is a major red flag for a commercial real estate space. It shows that the space is not ideal for any number of reasons, including location, demographics or function. Be sure to research who the previous tenants were and determine why the space did not work out for them. – Ron Costa, OpenAiRE
9. Unrealistic Timelines
Given the current disruption in the supply chain and labor shortages, we advise all clients to understand the potential lead time for work slated for a commercial space before signing their lease. We want to help clients avoid paying rent for a space if the conditions are unfinished or uninhabitable. Working with an expert to set realistic timelines is key. – Adam Mopsick, Amicon
10. Lack Of Contact Information
Make sure you know the person across the table who signed the lease and make sure you’re able to contact them directly in the event of confusion or disagreement. It’s always worth asking to be kept informed should that person change roles, and if they do, it’s worth a friendly phone call to touch base. – Clark Twiddy, Twiddy & Company
