The Lucifers Lurking in your Lease
By Nina L. Kaufman, Esq

Part 2

<<Previous

4. Termination of Lease and Default - Commercial landlords have a powerful arsenal. Leases contain all sorts of reasons for which a landlord can terminate a lease or extract penalties from a tenant. If you are late with the rent, you can get slapped with a notice that you are in default, tacking on interest and attorneys' fees (yes, just for sending the notice) - even where the situation was not your fault, such as a check lost in the mail. Should you fail to correct the problem by the deadline in the notice (usually two weeks or less), that alone can be grounds for eviction. Don't expect too much sympathy from the courts; they are none too lenient in excusing the defaults of commercial tenants.

Furthermore, for as many remedies landlords have against tenants, tenants have virtually none against landlords. Let's say that, for whatever your reasons (good or bad), you need to terminate the lease early in order to move to larger or smaller space. Nonetheless, a landlord could still hold your business responsible for paying the rent through the balance of the lease term, unless there is another tenant to take the space at the same or higher rent. In states like New York, a landlord has no obligation to try to find a new tenant. So you may get stuck having to wait until the end of the lease to leave the space, regardless of whether you want or can afford to stay there.

5. Personal Guaranties and Good Guy Clauses - Landlords often ask for a personal guaranty from a business owner - and may refuse to rent the space without one. A personal guaranty provides that the "guarantor" (usually, the business owner) will make good on any lease payments that the business itself fails to meet. Effectively, a personal guaranty adds the business owner as an obligated party to the lease. If you provide a personal guaranty, it enables the landlord to collect the rent (and additional rent) from either you or your company. This is a risk for small business owners like Patricia, where the company provides her sole source of income: if the business cannot make enough money to meet its expenses, it is unlikely that business owner herself will be able to make the payments in its place. As a result, like Patricia, the only escape may be to file for personal bankruptcy protection.

However, some landlords will include a "good guy clause" in the lease. This provides that, in the event that a business needs to terminate a lease early, the landlord will not enforce the personal guaranty as long as the business has vacated the premises and has paid all rent up to the date of termination. This can allow business owners a "way out," and might have saved Patricia from having to declare personal bankruptcy. Bear in mind, though, that the landlord may still look to the business - even if not the owner -- to continue to make all rent payments through the end of the lease. Be sure to read the good guy clauses carefully, as some will only allow you to get out of the personal guaranty in the event that your company is going out of business - not just for any general desire to leave the space.

Conclusion

Negotiating the terms of a lease involves more than just knowing what space you want and how much the rent will cost your business. There are a number of hidden costs and factors that can escalate the rent over and above what you originally budgeted to pay each month. If the landlord presents you with a "take it or leave it" proposition, be sure you can financially absorb the risks that lurk within the lease. If not, you may be better served by avoiding those Lucifers altogether and looking for other space.

<<Back