Don’t Ignore the Risky Sections of a Lease for Your Small Business

Small business owners are the backbone of our economy. They are the entrepreneurs who solve important problems through their service. It is always exciting when a startup business grows, and the business requires a new space to continue the growth.

A small business owner considering signing a commercial lease should take great care in understanding the implications of each section. Commercial leases are different from residential leases. Residential leases are usually very simple, contain standard form language and are subject to consumer protection laws. Commercial leases are far more complex and require a great deal of analysis to understand the implications to the tenant.

Here are just three of the most common sections pertaining to commercial leases that small businesses should understand:

• What are My Responsibilities in a Triple Net Lease?

 Small business owners seeking office space might hear the term “triple net lease.” A tenant obviously pays rent to the landlord during the term of the lease for the right to use the space. In most residential leases, the tenant simply pays rent plus some (or all) of the utilities.

In commercial leases, the total amount a tenant pays to the landlord is usually the sum of “base rent” plus “additional rent.” Base rent is the cost to rent the space. Additional rent is typically additional amounts paid by the tenant to cover the operating costs of the property. If the lease requires the tenant to pay property taxes, building insurance and maintenance costs, the lease is considered to be a “triple net lease.”  Triple net makes sense for commercial leases because it reduces the landlord’s property management costs.

• What Is a Confession of Judgment?

 A confession of judgment clause is legal in Pennsylvania but only for commercial leases. It is outlawed entirely in 47 of 50 states because the result can be harsh to the tenant. A confession of judgment authorizes the landlord under the lease to enter a judgment in the court if the tenant breaches the lease. A confession is an automatic and immediate judgment against the tenant without the ability to defend the case.

The judgment against the tenant can be for possession of the property, money damages or both. Small business owners should negotiate confession of judgment clauses to the extent they feel necessary for their business.

• Can an Indemnification Clause Harm My Business?

 Commercial leases almost always contain a section addressing the question of indemnification. The purpose of indemnification is to decide who pays for damages regardless of who is at fault. For example, suppose a person is injured on the leased property. The indemnification clause decides in advance whether the tenant or the landlord is responsible to pay the compensation to the injured person. If the lease is in favor of the landlord, the tenant may be responsible to pay the landlord’s share plus attorney fees.  

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