What are the biggest red flags in a commercial lease?

Key red flags include uncapped CAM charges, personal guarantees, missing exclusivity clauses, broad indemnification provisions, demolition or relocation rights for the landlord, and overly restrictive use clauses.

Should I sign a personal guarantee on a commercial lease?

A personal guarantee makes you personally liable for the lease even if your business fails. Consider negotiating for a limited guarantee (capped at a certain amount or time period) or a 'good guy' guarantee that ends when you vacate.

What are CAM charges in a commercial lease?

Common Area Maintenance charges cover shared expenses like lobbies, parking lots, and hallways. They can increase substantially each year, so look for a cap on annual increases or a fixed CAM amount in your lease.

Commercial Lease Red Flags: Protect Your Business Before Signing

Commercial Leases Are More Complex Than Residential

Unlike residential leases, commercial lease agreements have fewer consumer protections and far more room for negotiation. Missing a problematic clause can cost your business thousands of dollars.

Financial Red Flags

Uncapped CAM charges: Common Area Maintenance (CAM) charges can balloon if they are not capped with an annual increase limit. Insist on a cap or fixed amount.
Triple net (NNN) surprises: In NNN leases, you pay property taxes, insurance, and maintenance on top of rent. Make sure you understand the total cost, not just the base rent.
Percentage rent without a breakpoint: Some retail leases require a percentage of gross sales above a threshold. If the breakpoint is set too low, this can significantly increase your costs.
No rent abatement for casualty or condemnation: If the property becomes unusable, you may still owe rent without an abatement clause.

Operational Red Flags

No exclusivity clause: If you run a specific type of business, consider whether the landlord can lease adjacent space to a direct competitor.
Restrictive use clause: Overly narrow use clauses can prevent you from pivoting your business model, even within your space.
Landlord approval for improvements: Watch for clauses requiring landlord consent for any alterations, even minor ones, with no obligation to approve within a reasonable timeframe.
Assignment and sublease restrictions: If you may need to transfer the lease or sublet, ensure the lease does not prohibit it outright.

Liability Red Flags

Personal guarantee: Landlords may require you to personally guarantee the lease, making you liable even if your business entity closes. Negotiate for a limited or "good guy" guarantee.
Broad indemnification: Clauses requiring you to indemnify the landlord for anything that happens on the premises, including the landlord's own negligence.
Waiver of jury trial: Some leases include a waiver of your right to a jury trial in any dispute.

Termination Red Flags

Demolition or relocation clauses: Some leases allow the landlord to relocate your business within the building or terminate the lease for redevelopment.
Excessive default penalties: Understand what triggers a default and how much time you have to cure it.

When to Consult a Lawyer

Consider consulting a commercial real estate attorney before signing any commercial lease, especially if it involves a personal guarantee, complex rent structures, or a long-term commitment. The negotiation stage is your best opportunity to protect your business.

This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.