Your lease does not have to be the cause for your business failure. While the business owner should exercise due diligence when entering, modifying or breaking the lease agreement, in today’s economic environment, many landlords use reasonable business judgment to attract, retain or say farewell to their tenants. When executing a commercial lease agreement, a business not only seeks to enable its operations, but it also acquires responsibilities that are critical to its success. Generally, a commercial lease agreement can be complex and may impose great liability if the company fails or moves locations before the lease expires. A prospective tenant must understand the importance of preparing for the lease negotiation and understanding its commitments in order to minimize risk. When entering, modifying or exiting the lease agreement, a business owner must consider the following, among other factors:

The lease agreement must be in writing. Do not trust on any oral promises by the landlord, as these are not enforceable. Make sure that the landlord has the legal power to lease the property. If you discover after signing the lease that the landlord does not have the power to lease, this may be grounds to invalidate the contract. A start-up business should consider a shorter-term lease with options to renew upon lease expiration. A longer lease can represent quite a bit of liability if the business fails, and this risk can extent to personal liability if the business owner signs a personal guarantee. Conduct a “competitive rates� study of similar space prior to negotiating a rental rate or in preparation to negotiate a lease modification. This will provide leverage that a reasonable landlord should consider.

Negotiate a right to sublease or transfer the lease. This will provide added flexibility during difficult economic times or a need to change venue. The security deposit amount given at contract signing may likely be credited to the tenant at the end of the lease term, if the premises are left in good condition. When missing a payment or exiting a lease, ask the landlord to apply this deposit to amounts due. Some landlords may agree under certain conditions. Often businesses fail because of a poorly planned construction. To avoid this misfortune, make sure you have all needed permits and written contracts with all contractors, who must also be licensed. Competitive landlords usually provide a rent-free period (“rent abatement�) so that the tenant can prepare the premises for opening and a financial allowance for construction or tenant improvements. When it is time to exit the lease and all other options have failed, try a lease buy-out. A reasonable landlord may consider a cash payout of a lump sum much smaller than what is due under the lease, in exchange for release of your lease agreement. You can even negotiate an installment settlement payable over time. This alternative is less expensive than walking-out on the lease and having to defend a lawsuit for the remaining rent due on the contract. This may also be a much better alternative to bankruptcy.

Trying the above may free much needed resources that can be used to re-energize your business or can simply end a difficult situation. You may need the advice of an attorney to help you identify and implement a solution that best works for you. Copyright - 2010 Yasmin Tirado-Chiodini. All Rights Reserved. By Yasmin Tirado-Chiodini Attorney at Law and Entrepreneur