leasing space for your small business (2001)

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Leasing Space
For Your
Small Business
by Attorneys Janet Portman and Fred S. Steingold
1st edition
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First Edition JUNE 2001
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Index ELLEN DAVENPORT
Printing CONSOLIDATED PRINTERS INC.
Portman, Janet
Leasing space for your small business / by Janet Portman and Fred Steingold.
p. cm.
Includes index.

ISBN 0-87337-572-6
1. Commercial Leases. 2. Office leases. 3. Small Business Management. I. Steingold,
Fred. I. Title.
HD1393.25 .S74 2000
658.15’242 dc21 99-086801
Copyright © 2001 by Nolo
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material.

Table of Contents
Introduction
Part I:
Finding and Evaluating Space and
Developing a Negotiation Strategy
1
What Kind of Space Do You Need?
A. Do You Need to Move Now? 1/3
B. Setting Your Priorities 1/8
C. Rent, Deposits and Improvements 1/9
D. Location 1/10
E. Length of the Lease and When It Begins 1/12
F. Size and Physical Features 1/15
G. Other Tenants and Services in and Near the Building 1/18
H. Parking 1/19
I. Building Security 1/20
J. Image and Maintenance 1/20
K. Expansion or Purchase Potential 1/21
L. Preparing Your Rental Priorities Worksheet 1/22
M. Subleasing Space 1/25
2
Looking for Space and Using Brokers
A. How to Find Space on Your Own 2/3
B. Working With a Real Estate Broker 2/6
C. The Value of Hiring Your Own Broker 2/11
D. How to Find a Real Estate Broker 2/12
E. How to Choose a Broker 2/13

F. Signing a Contract With Your Broker 2/15
G. Handling Problems With Your Broker 2/20
3
Evaluating the Space and the Landlord
A. Visiting and Evaluating Prospective Space 3/2
B. Further Investigation of Promising Space 3/8
C. Environmental Issues to Consider When Evaluating Space 3/11
D. Learning About the Landlord 3/18
E. Management Companies 3/23
F. Holding the Space With a Deposit 3/24
4
Understanding the True Size and Cost of the Rental
A. How Landlords Measure Square Feet 4/2
B. Additional Rent: Gross Versus Net Leases 4/9
C. Percentage Rent—Sharing Profits With the Landlord 4/12
D. Computing the True Rental Cost 4/14
5
Setting the Stage to Negotiate
A. How Much Clout Do You Have? 5/2
B. Getting Past Deal Breakers 5/11
C. Letter of Intent 5/15
D. Finding and Paying for a Lawyer 5/24
6
Your Negotiation Strategy
A. Your Negotiation Strategy Worksheet 6/4
B. How to Use Your Negotiation Strategy Worksheet 6/11
C. How Your Lawyer Can Help With Negotiations 6/19
D. How to Modify the Landlord’s Lease 6/24
Part II:
Common Lease Terms

7
Lease Basics
A. How Leases Are Made and What They Look Like 7/3
B. Naming the Landlord and Tenant: Parties to the Lease 7/6
C. Describing the Leased Space 7/9
D. The Use Clause 7/12
8
The Length of Your Lease
A. When Do Your Legal Responsibilities Begin and End? 8/2
B. The Crafty Use of “As of” [Date] 8/5
C. How to Keep Track of Dates With a Timeline 8/6
D. Staying After the Term Ends: Holdover Rent 8/7
9
Rent
A. Basic Rent 9/3
B. Taxes As Additional Rent 9/7
C. Insurance As Additional Rent 9/13
D. Common Area Maintenance (CAM) Costs As Additional Rent 9/22
E. Audit Rights 9/25
10
Security Deposits
A. Where the Landlord Will Keep the Deposit 10/2
B. How the Landlord Will Use the Deposit 10/3
C. When the Landlord May Use the Deposit 10/4
D. The Fate of the Deposit at the End of the Lease 10/5
E. Letter of Credit: An Alternative to a Cash Deposit 10/6
11
Improvements and Alterations
A. Improvements Versus Trade Fixtures 11/3
B. Renting Space in a Building Under Construction 11/6

C. Improvements to Your Space 11/7
D. Paying for the Improvements 11/10
E. The Tenant Improvement Allowance (TIA) 11/14
F. The Building Standard Allowance, or “Build-Out” 11/15
G. Paying a Fixed Amount for Improvements 11/16
H. The Landlord Pays for All Improvements 11/17
I. When Do You Start Paying Rent? 11/17
J. Making Alterations During Your Tenancy 11/20
12
Maintenance, Utilities and Code Compliance
A. Maintenance, Repairs and Janitorial Services 12/2
B. Utilities 12/6
C. Compliance With Building Codes and Other Laws 12/9
D. Compliance With the Americans with Disabilities Act (ADA) 12/13
13
Parking, Signs, Landlord’s Entry & Security
A. Parking 13/2
B. Hours of Operation 13/3
C. Signs 13/4
D. Landlord’s Right to Enter Your Rental Space 13/5
E. Building Security 13/7
14
Option to Renew or Sublet and Other Flexibility Clause
A. Restrictions on Your Flexibility 14/3
B. Option to Renew the Lease 14/4
C. Option to Expand Clause 14/8
D. Rights of First Refusal and First Offer 14/11
E. Option to Lease Less 14/13
F. The Assignment and Sublet Clause 14/16
G. Termination Clause 14/26

H. Option to Purchase 14/31
15
Insurance Clauses
A. Property and Liability Insurance 15/2
B. Insuring Your Trade Fixtures and Inventory 15/2
C. Rental Interruption Insurance 15/3
D. Business Interruption Insurance 15/4
E. Leasehold Insurance 15/5
F. Waivers of Subrogation Rights 15/5
G. Indemnity or Hold Harmless Clause 15/7
16
Breaking the Lease, Disputes and Attorney Fees
A. The Landlord’s Remedies If You Fail to Pay Rent or Breach
Another Lease Term 16/2
B. The “No Waiver” Clause 16/7
C. Your Remedies If the Landlord Breaches 16/8
D. Mediation and Arbitration 16/11
E. Attorney Fees 16/14
17
Foreclosures, Condemnations, Guarantors and
Other Clauses
A. Subordination and Attornment 17/3
B. Estoppel Certificates 17/10
C. The Condemnation Clause 17/12
D. Surrender Clause 17/17
E. The “Entire Agreement” Clause 17/19
F. The “Severability” or “Survival” Clause 17/19
G. Lease Guarantors 17/20
H. Signatures 17/22
Index

Introduction
L
easing Space for Your Small Business is
a legal and practical guidebook for anyone
looking for commercial property to lease.
The book is divided into halves—the first,
Part I, focuses on finding and evaluating
rental space and developing a negotiation
strategy. Part II covers the most common
lease clauses most tenants will encounter in
the landlord’s lease, explaining their mean-
ing, suggesting ways to negotiate better
terms and warning of dangerous traps. It
also alerts you to tenant-friendly clauses
that you will never see in a landlord’s first
draft. All types of businesses—from retail
stores in strip malls to one-person consulting
firms downtown to small midsize manufac-
turing firms—can use this book.
Our book does not include a lease, for
two reasons. First, in most cases your land-
lord will hand you a lease, so there’s no
point in bringing one yourself. Second, and
more importantly, there is no such thing as
a “standard” lease (though you may hear
your landlord argue differently). Commercial
leases can and should reflect the give-and-
take between the landlord and tenant—one
size simply doesn’t fit all. No matter how
official-looking the document that comes

out of the landlord’s or broker’s briefcase,
keep in mind that it’s always negotiable.
Of course, you won’t be negotiating in a
vacuum. Most of the time, since the land-
lord’s lawyer drafted the lease, it will be
written to the landlord’s advantage. Your
ability to make the changes you want will
depend primarily on the market—if it’s a
renter’s market, your power goes up. After
that, your success as a negotiator will
depend on understanding the meaning and
interrelation of the various clauses.
Unlike a residential lease or other aspects
of your business that are heavily regulated
by the law (such as the way you handle
employment matters), there are surprisingly
few legal constraints on what you and the
landlord can agree to. Quite possibly the
biggest impediment to negotiating a lease is
the dense, incomprehensible language of
I/2 LEASING SPACE FOR YOUR SMALL BUSINESS
most of them. We take the mystery out of
the legal jargon by reducing it to plain
English. Most of the time, you’ll say, “Aha,
that’s really pretty simple after all.”
We suggest that you show any lease
you’ve negotiated to an experienced real
estate lawyer before you sign it. Having
read this book, you’ll be in a position to
discuss the pros and cons of the lease and

won’t have to spend time and money while
the lawyer repeats what you already under-
stand. When you consider the amount of
money that you’ll be paying a landlord
over a typical five- to ten-year lease, paying
for a lawyer’s review will be well worth the
expense.
Guide to Icons Used in This Book
Reference or further reading: This
icon lets you know where you can
read more about the particular issue or
topic discussed in the text.
This icon means that you may be
able to skip some material that
doesn’t apply to your situation.
This icon alerts you to a practical
tip or good idea.
This is a caution to slow down and
consider potential problems you
may encounter.
■
Part I:
Finding and Evaluating Space And
Developing a Negotiation Strategy

Chapter 1
What Kind of Space Do You Need?
A. Do You Need to Move Now? 1/3
1. Working From Home 1/4
2. Staying in Your Current Rental 1/6

B. Setting Your Priorities 1/8
C. Rent, Deposits and Improvements 1/9
1. Rent 1/9
2. Deposits 1/9
3. Other Improvements and Expenses 1/10
D. Location 1/10
1. Neighborhood and Neighbors 1/10
2. Commuting Time 1/12
3. Access to Public Transportation 1/12
4. Expressways, Freeways and Throughways 1/12
E. Length of the Lease and When It Begins 1/12
1. Length of the Lease 1/13
2. Move-In Date 1/15
F. Size and Physical Features 1/15
1. Size of Space 1/15
2. Interior Needs 1/16
3. Soundproofing 1/17
4. Operating Windows 1/17
1/2 LEASING SPACE FOR YOUR SMALL BUSINESS
5. Control of Heating and Cooling 1/17
6. Storage Space 1/18
7. Private Restrooms 1/18
8. Technological Capacities 1/18
G. Other Tenants and Services in and Near the Building 1/18
H. Parking 1/19
I. Building Security 1/20
J. Image and Maintenance 1/20
1. Image 1/20
2. Maintenance 1/21
3. Nonsmoking Policy 1/21

4. Visibility and Signage 1/21
5. Special Requirements 1/21
K. Expansion or Purchase Potential 1/21
1. Ability to Expand Space 1/22
2. Potential Purchase 1/22
L. Preparing Your Rental Priorities Worksheet 1/22
M. Subleasing Space 1/25
WHAT KIND OF SPACE DO YOU NEED? 1/3
Y
our business needs should shape
your search for commercial space.
Rent will be an obvious consider-
ation, as will the building’s location and the
size of the space. But for most small busi-
nesses, finding the right space involves
considering more than price, location and
size. Parking, the ease of making improve-
ments, the types of nearby complementary
and competing businesses and numerous
other factors such as the building’s image
and potential for expansion may affect your
choice of a rental space.
Depending on your requirements, the
number of rentals that will satisfy them will,
naturally, shrink.
EXAMPLE: John’s company, Hi Fives,
manufactures sports equipment. He’ll
need space with a loading dock and
floors strong enough to support his
equipment. The image of the neighbor-

hood isn’t much of a factor, nor is the
makeup of nearby businesses.
Mary’s business, a children’s clothing
store, will do best if it’s near other re-
tail establishments, preferably those
that parents are likely to frequent. She’s
on the lookout for ground-level space
that will be welcoming, with lots of
windows and light.
Forces beyond your control may further
limit your choices. The availability of com-
mercial space will depend in large part on
current market conditions. Sometimes the
vacancy rate is high, meaning you’ll have a
good selection of rental spaces and relatively
low rents. Other times the vacancy rate is
low, meaning you’ll have fewer choices
and higher rents. But regardless of your
requirements or market conditions, you can
almost always locate suitable space if
you’re willing to invest some time and
effort into the process.
Whether you’re a small start-up or a long-
term established business—a fledgling
Internet enterprise or a bookstore passed
down from your grandfather—you should
begin each search by carefully thinking
through your needs. This chapter shows
you how to analyze what’s most important
in a rental—before you hit the pavement or

engage a broker to help you find the right
spot. A clear understanding of what you do
(and don’t) want for your business will
save precious time and money, commodities
that you undoubtedly want to plow into the
business itself.
A. Do You Need to Move Now?
Before you plunge headlong into the
search for suitable commercial space, think
carefully about whether you really need to
find space now. It may make more sense to
run your business from your home. Or, if
you’re already renting space but looking to
move, you might consider ways to improve
your current lease situation and avoid the
expense and inconvenience of relocating.
1/4 LEASING SPACE FOR YOUR SMALL BUSINESS
If staying put or working from home
are not options, move ahead to Section
B for advice on setting priorities for rental
space.
1. Working From Home
If you’re just starting out in a business that
doesn’t require significant space or ready
access to the public, maybe you can keep
expenses low by working out of your
house or apartment. You may have space
in your basement or garage or spare bed-
room that you can use for your business.
Or, it may be possible to devote a corner of

the dining or living room to business
purposes, while using the rest of the room
as part of your residence. Attractive office
furniture is widely available that blends
nicely with regular household furnishings.
Home-based businesses are quite feasible
these days because technology lets you
keep in touch with the world through faxes
and email. And delivery companies such as
UPS and Federal Express compete with the
U.S. Post Office for moving packages and
hard copies of documents speedily and
reliably to virtually every imaginable location.
Credit cards can facilitate the purchase or
sale of goods and services from or to a
home-based business.
But while your house or apartment may
work just fine if you have a small office-type
business or are working as a consultant, it
normally won’t meet your space needs if
you’re in a retail or wholesale business
which requires customers or clients to come
to you. Similarly, service businesses—such
as restaurants and repair services—require
commercial space.
If a home business seems right for you,
make sure there are no legal restrictions to
your working at home. In particular, here’s
what to check:
• Local zoning ordinances. These may

restrict the type and amount of traffic,
bar outside signs, prohibit or limit the
number of employees and set a limit
on the percentage of the floor space
that can be devoted to the business.
Contact the office of your city attorney,
city manager or mayor for information
on zoning ordinances that may affect
your business.
• Deed restrictions in condominiums and
planned unit developments.
These
often prohibit commercial activities,
including home businesses. Review
your covenants, codes and restrictions
(CC & Rs) for details.
• Apartment leases or rental agreements.
These sometimes specify that the
premises are to be used for residential
purposes only, or restrict use to
specified businesses, such as family
daycare.
WHAT KIND OF SPACE DO YOU NEED? 1/5
Even if there are no restrictions, a home
business may not work for you personally.
You might not want customers or business
associates intruding into your family’s space,
and you may be concerned that you’ll have
a hard time putting business aside if it’s as
close as the next room. Many home business

entrepreneurs have a hard time resisting the
attractions (and distractions) of the kitchen,
television and household chores. And if
you have small children, working at home
may be especially difficult.
Businesses that are run from home may
also need to comply with federal and state
laws regarding access for disabled persons.
(See Chapter 12, Section D, for more on
this issue.)
If you run a home business, you may
need special insurance. Your home-
owner’s policy may deny coverage if the pre-
mises—your home—are used for commercial
purposes. This means that even if you merely
have a computer and a file cabinet that you
use to run your home-based business, your
policy may not cover business property that is
destroyed in a fire or other disaster at your home.
Even worse, once you begin using the home
as a place of business, your homeowner’s insur-
ance may not protect you if someone, even a
non-business visitor, is injured at the home. Be
sure to raise these concerns with your insurance
agent or broker, who may suggest that you pur-
chase a commercial policy or a special business
rider to your homeowner’s policy. (Chapter 9,
Section C, explains business insurance issues
for non-home-business outfits in detail.)
Resources on Home Businesses

This book focuses primarily on leasing
commercial space. Of course, doing busi-
ness at home is still a viable option for
many small businesses. Fortunately, there’s
a lot of valuable guidance out there if you
decide that home is where the business
is—and will be for the foreseeable future.
The Legal Guide for Starting & Running a
Small Business,
by Fred Steingold (Nolo),
provides helpful information about the legal
issues involved in operating a home-based
business, including how to comply with
zoning ordinances and private land use
restrictions, getting the right kind of insur-
ance and making the most of tax deductions
for the business use of your home.
Home Office Computing
is a popular
magazine that offers practical information
on outfitting and running a home-based
business and making use of the latest
money-saving and time-saving technology.
For subscription information, call 800-288-
7812 or visit www.hoc.smalloffice.com.
Also, check out any of the terrific books
by the reigning gurus of home-based busi-
ness, Paul and Sarah Edwards. Their latest
efforts include
The Best Home Businesses

for the 21st Century, Making Money With
Your Computer at Home,
and an updated
version of
Working From Home
(all
published by J.P. Tarcher/Putman).
A good starting point on the Web is
www.bizoffice.com, which provides
numerous links to other sites for home-
based businesses.
1/6 LEASING SPACE FOR YOUR SMALL BUSINESS
2. Staying in Your Current Rental
Perhaps your business already occupies
commercial space but you feel, for one
reason or another, that it’s time to move.
Maybe you’ve outgrown your current digs
and need more spacious quarters; or you’ve
had your fill of your nickel-and-diming land-
lord. But first, look closely at whether it is
at all possible to stay put. Moving can be
costly and inconvenient. For one thing, you’ll
need to pack up your furniture and equip-
ment—and maybe your stock of goods, too,
if you have a retail or wholesale business.
Then there’s the cost of hiring a moving
company or at least renting a truck to make
the move. Depending on your business,
you’ll need to change your stationery,
brochures and advertising, and you may have

to buy new furniture and equipment. What’s
more, you may lose valuable employees
who cannot (or don’t want to) make the
transition to a new area. Your day-to-day
operations will be interrupted and you may
lose customers or clients who can’t find
your new location or feel it’s inconvenient.
While moving doesn’t present insurmount-
able obstacles, maybe you can avoid a move
entirely by working with your landlord to
solve problems with your current rental.
Landlords will often do what it takes to
keep a tenant from leaving since it can be
expensive to carry empty space and then
revamp it for another occupant.
So make a list of the problems that make
you want to move and see if they can be
overcome. Here are a few examples:
• Too pricey. If the space is too expensive
or you need less room because of
downsizing your business, the land-
lord may be willing to let you bring in
a sublet or reconfigure the space.
•
The wrong interior look. Sometimes,
space can be vastly improved by
simple improvements such as adding
or removing interior walls or installing
better lighting.
•

Insufficient space. If you don’t have
enough space, maybe the landlord will
let you take over an adjoining space
(if it’s empty) or allow you to move to
larger space within the building—
alternatives that are likely to be
cheaper and less disruptive than
moving to a completely new location.
• Building security or services. If you’re
concerned about intruders or shabbi-
ness, ask the landlord to provide
better security and maintenance.
At least explore these possibilities. You
have nothing to lose by asking your landlord.
Before you charge off to your landlord’s
office, however, take a minute to consider
whether your list of gripes represents truly
important issues for your business. One way
to measure their importance is to compare
your dissatisfactions with what you would
look for in a new rental. In Section B, below,
we suggest ways to organize and rank your
rental priorities. If you go through that exer-
cise and find that the items on the top of
the list are precisely those that are missing
from your current location, you know it’s
time to act.
WHAT KIND OF SPACE DO YOU NEED? 1/7
Check Your Current Lease Before You Leap
space after the stated termination date.

You might be able to negotiate a
short-term extension of your current
lease. If the landlord won’t give you
an extension, check to see whether
your lease imposes onerous “hold-
over” provisions. Landlords typically
charge big rents to those tenants who
don’t leave on time. Holdover provi-
sions are explained further in Chapter
8, Section D.
• Options and sublets. An option clause
in your current lease could signifi-
cantly affect your decision and ability
to move. Your lease may give you the
option to renew, and perhaps pick up
additional space as well. If you never-
theless want to move, it may be wise
to investigate whether you can exercise
the option—but instead of using it
yourself, sublet the space at a profit
and move your operation to a new
location. See Chapter 14 for detailed
explanations of options and subletting.
If you’re currently renting space and plan
to move elsewhere, check your lease first.
Here’s what to look for:
• The exact termination date. Try to
begin your search for new space well
enough in advance so that you won’t
feel rushed. If the termination date is

too far off, however, you may be forced
to begin your new lease before the old
one is over. It’s a delicate balance—
you don’t want to be responsible for a
period of double rents; nor do you
want a gap between lease periods.
• The possibility of a buyout. If you
need to move before the current lease
expires, look to see if you can leave
early by paying a “buyout amount.”
This is money that the landlord accepts
in exchange for letting you out of your
lease early.
• Staying longer. If your new space isn’t
ready on time—a common problem—
it would be smart to find out if you
can continue to occupy your current