Windsor Attorney Discusses Common Business Mistakes
Ideally, we would like to live by one of the golden rules, “do unto others as you wish to be done unto you”; however, in the context of business lease agreements for office space, following this golden rule is a naïve approach which can lead to devastating consequences not only for your business but also for you personally. This article will briefly touch upon common mistakes to avoid, negotiation tactics, and how to protect yourself from personal liability.
COMMON MISTAKE 1 – Failing to recognize that a commercial lease agreement is a legal document which has real consequences.
At the very least you need to carefully read the agreement to recognize what you do not understand. Once you have done this you can seek clarification from the landlord, or better yet an attorney, to explain the provisions of the agreement so that you are completely familiar with what you are being asked to commit to. Often times the commercial landlord is using the same general commercial lease agreement that they have used for years and may have little to no understanding of it other than its duration and the monthly payment amount. By simply recognizing what you do not know about the agreement and educating yourself about the consequences of the contained provisions, you will have a distinct advantage during the negotiation of the terms.
COMMON MISTAKE 2 – Believing the commercial lease is a take it or leave it proposition.
Everything is negotiable. Given the economic climate and vast quantity of commercial office space available, the lessee sits in a greater position of bargaining strength than ever before. Monthly payments, tenant finishes, lease duration, and renewal options, once ironclad terms of a commercial lease agreement proposal, are now bargaining chips to be negotiated and often times side in favor of the lessee.
COMMON MISTAKE 3 – Signing the commercial lease as an individual rather than a representative of the business.
As stated earlier, the commercial lease offered by the landlord is often times a general form that has been used by the landlord for as long as they have owned the property. As such, the landlord will simply input the name of the person entering into the commercial lease agreement, for example “Jane Doe or John Doe hereinafter referred to as lessee.” The signature line will also provide for Jane or John Doe’s signature.
Having your individual name listed as the lessee and signing the agreement in your individual capacity is a crucial misstep exposing you to personal liability under the agreement. The commercial lease agreement should have your business listed as the lessee and a space for your signature as a representative of your company. For example, the commercial lease agreement should reflect “(Your Company Name Here), hereinafter referred to as lessee”. Also, under the commercial lease agreement you should always sign as a representative of the company and not as an individual.
YOUR COMPANY NAME HERE
Jane Doe, President
By listing your company as the “lessee” and signing the contract as a representative for your company, the landlord’s only recourse in the case of default under the lease agreement would be limited to pursuit of your company’s assets. Your personal assets, such as your automobile, home, and personal bank accounts would be protected.
COMMON MISTAKE 4 – Beware of the personal guarantee.
Typically you have spent a great deal of time and money setting up some form of business entity for your business, whether it is an LLC, S Corp, or C Corp to shield your personal assets from business liabilities. Often times commercial lease agreements ask the business owner to sign a personal guarantee in addition to, or as a part of, the commercial lease agreement. The personal guarantee overcomes the personal asset protections of using a business entity. By signing the personal guarantee you literally guarantee that if the business is unable to pay or defaults on the commercial lease agreement, you, in your individual capacity will make the payment or cure the default. If you or your company are unable to cure the default the landlord can now go after the assets of the business as well as your personal assets to satisfy the default provisions of the commercial lease agreement. It is highly recommended to negotiate the removal of the personal guarantee. This may be accomplished by putting down a larger security deposit, agreeing to a slightly higher monthly payment, or agreeing to a longer term lease agreement. It is advisable that if removal of the personal guarantee is not an option then attempt to limit the duration of the personal guarantee in relation to the commercial lease agreement. If the commercial lease agreement is for five years, negotiate to have the personal guarantee in effect for the first two or three years of the lease. After the personal guarantee expires the landlord’s only recourse in a default situation would be limited to the assets of the business, insulating your personal assets as you originally intended.
Robert J. Herrera, Managing Partner at Black Suit Law
Call Mr. Herrera today to discuss your business lease: (970) 893-4985