What Every Business Owner Must Know Before Signing a Lease

Table of Contents

What Every Business Owner Should Know Before Signing a Commercial Lease

Commercial leases play by different rules than residential rentals. Courts usually enforce them as written, and many are drafted to favor the landlord. That means a single missed detail can lock you into years of payments or unexpected liabilities.

Allocation of risk in plain English

Some leases shift nearly all risk to the tenant. Landlords may argue that one party carries the risk and buys the insurance, a setup often called allocation of risk. In extreme cases, the language can be so one-sided that a tenant ends up responsible even when the landlord causes the harm.

The automatic renewal trap

Many leases renew on their own unless you send a written notice in a very specific window. A common pattern is a six-year term that auto-renews unless you notify the landlord between six and twelve months before the end of year six. Miss that window and you might be on the hook for another full term.

Simple fix that saves headaches

Negotiate out auto-renewal or convert it to a mutual “let’s talk” notice. Then, put the renewal window on a shared company calendar so it pings you well in advance.

Personal guarantees

Avoid signing a personal guarantee whenever possible. If you do, your own assets can be at risk if the company can’t perform under the lease.

Indemnification that flips liability onto you

Indemnity language can make you “step into the shoes” of the landlord, absorbing liabilities that would normally be theirs. If the clause says you indemnify the landlord for almost everything, you are carrying more than just rent risk.

Big-ticket repairs and replacements

Roof, parking lot, and HVAC are the classic surprise expenses. Some leases push those costs to tenants even when the asset is at the end of its life.

A fair way to split these costs

Push for a prorated approach tied to useful life and your actual time in the space. For example, two years of a 20-year roof equals 10 percent of a replacement, not the whole bill. In multi-tenant buildings, that share should then be divided among tenants, often by relative square footage.

Smart process before you sign

Track notice windows, rent bumps, renewal options, and audit rights in one place your team reviews quarterly. That one habit prevents many lease “gotchas”.

When to bring in an attorney

Leases are negotiable. A lawyer can flag landmines and rework terms. Expect to spend a few thousand dollars; that fee is small compared to a six-figure risk buried in the fine print.

Red-flag review

Auto-renewal window and notice method certified mail, email, portal
Any personal guarantee and ways to limit it cap, burn-off, higher deposit
Indemnity scope and carve-outs for landlord negligence or willful misconduct
Who pays for roof, parking lot, structural, and HVAC and whether costs are prorated by lifespan and square footage

Negotiation wish list

No automatic renewal or mutual option to discuss renewal
Prorated capital replacements based on remaining life
Clear maintenance vs capital responsibility split and warranty transfer on equipment
Indemnity limited to your negligence, not the landlord’s acts
Reasonable attorney fee clause and venue that suits your business

Final take for busy owners

Commercial leases can be fair deals, but only when you read the fine print, calendar deadlines, and negotiate the handful of clauses that matter most. If the dollars at stake are large, paying for experienced counsel is money well spent.

Video Transcript

Why commercial leases are a different game than residential

If you’ve never signed a commercial lease before, it’s easy to assume it works like a residential rental. It doesn’t. These agreements are enforceable, often written entirely in the landlord’s favor and filled with risk if you’re not paying close attention. From automatic renewals to personal guarantees to hidden repair obligations, lease terms can bind your company for years or cost you tens of thousands if you miss a single deadline.

Setting the stage for leases in your business journey

As we wrap up this section on contracts, there is one other important type of contract that you probably have encountered. And if you haven’t, you will in the future, and that is a lease. Renting some office space or some place for your business. It doesn’t matter if it is a big warehouse, a manufacturing plant, or just a little office where your employees can go.

Commercial agreements carry real weight

These are contracts that are generally fully enforceable. They are considered commercial real estate agreements. So even though residential real estate agreements, like when people rent a home, have all sorts of state restrictions on them, commercial real estate agreements are generally fully enforceable.

A cautionary tale about one sided terms

Why does this matter? I once saw a one-sided lease that was so bad that the landlord could walk into the business at any time without notice, negligently start a fire, and if the fire burned up everything, not only was the landlord not liable for everything the landlord burned up, the business owner who is renting this space was liable to pay the landlord for damage the fire caused to the landlord’s building.

You might say, “That sounds atrocious. That sounds so one-sided.” You are absolutely right. But these are enforceable because the idea that courts have is “Sophisticated parties, business owners, have every right to enter into a deal they want.” And sometimes you do a deal like that where all the risk is put on one party, and then that party gets the insurance.

How insurance and contract terms shift exposure

It is called Allocation of Risk. Basically, instead of both sides getting insurance policies for a fire, they say, ” Hey, one of us will get the insurance policy, and in the contract, we will just have all the risk on that one party.” What is the point here? These real estate agreements, or leases, can be very one-sided in favor of the landlord because the landlord writes them usually.

First checks before you sign

So, I encourage you to at least know what you are getting into there. If at all possible, avoid signing a personal guarantee. So you, at least, aren’t personally liable for the lease, but many landlords insist on it. Other things to watch out for are automatic renewals. Many times a lease will say, ” This is a lease for six years, but it automatically renews unless you give notice that you want to leave the lease at least six months before the renewal, but not more than a year before the renewal.

The narrow notice window that trips up tenants

So in other words, there is a six-month window in the sixth year of your lease. It is the first six months of that year where you have to give notice that you are not going to renew the lease. That is a provision that has caught many business owners by surprise when it is too late. Because maybe four months before the term is about to end, they go take a look at the lease, and then they realize, “What? It automatically renewed? We are on the hook for six more years of lease payments?”

Practical fixes during negotiation and operations

So what do you do about this? Well, typically you would either negotiate the term and say, “Hey, let’s not have automatic renewal. Maybe we have to give a notice to each other to have a conversation at that time and make a decision about that.”

But also one practical tip is just have a company calendar where you put all the really important legal deadlines, and then the lease renewal period is one of those important deadlines that typically goes out many years. And then that is ideally something that you are revisiting on a regular basis, and you are looking at all of these important deadlines. We will talk about more important deadlines coming up to put on that company calendar, but the lease renewal is one of the big ones.

What stepping into the landlord’s shoes really means

The second provision to look at in the lease—I mean, there are a lot of them, but one of the other big ones is the Indemnification Provision. That is a huge word. It is often confusing, but maybe I can make it really simple. Let’s say, for example, we will use that landlord example and you.

If the landlord starts the fire, usually the landlord would be responsible for that. But if the lease says, “You indemnify the landlord,” that means you are stepping into the shoes of the landlord. So whatever would happen to the landlord would happen to you. You know, the landlord leaves his shoes, You get into his shoes, and now whatever the landlord was responsible for, now you are responsible for.

That is what indemnification means. It means all of the responsibility and liability transfers from one person to another. That is a big deal. So I recommend paying close attention to the indemnification provision in a lease. The other big one that regularly comes up is if the roof needs to be replaced, the pavement on the parking lot needs to be redone, or if the HVAC system like the heater or air conditioner fail and a new one needs to be purchased, who is responsible for that?

Roofs, pavement, HVAC and who pays

Landlords often try to have the tenant responsible for that. But think about that. If a roof is expected to last for 20 years and the last time it was replaced was 19 years ago and let’s say you are signing a two-year lease. Should you have to replace a 20-year roof just because you happen to have a lease right at the end of the lifespan of the roof?

That is not fair. So, usually when negotiating that, I either tell the landlord, “Hey, look, we are not going to pay for any of that, or we will pay a prorated amount.” Prorated just means, “We will pay our portion. We will pay our percentage. So, hey, if we are here for two years on a 20-year roof, we will pay 10 percent towards a replacement if a replacement needs to occur. Because we are there for 10 percent of the lifespan of the roof, we will pay for 10 percent of that roof.”

Sharing the cost when multiple tenants occupy the building

Now, by the way, if that building is shared among a few different tenants, it is going to be further divided, let’s say there are five tenants, you should only pay your fifth. Assuming all the other tenants are the same square footage, same size space. You should only pay a fifth of the portion that is prorated.

When legal help pays for itself

So that is another big gotcha. A rude surprise that tenants have encountered. If you are going to sign a lease, I highly recommend you use an attorney. There are a lot of things you can do without an attorney or you can do with, like, ChatGPT. You can try that with a commercial lease, but usually there are going to be some terms that need to be negotiated, and at least at this point AI can’t negotiate those for you, so usually when signing a commercial lease, it is well worth the money to pay a couple grand to an attorney to analyze the possible lease and to negotiate it on your behalf.

Budgeting for negotiation and weighing the stakes

By the way, the negotiations, sometimes that can go on for a while. And you might pay three, four, or five thousand dollars. But when you find out what you are negotiating, you can decide, ” Hey, is it worth paying an attorney to negotiate this?” But if it is a hundred thousand dollar or two hundred thousand dollar term, obviously, it is worth spending a thousand or two more on an attorney to try to push back on that term and work out some reasonable compromise.

How these lessons connect to other agreements

So this concludes the section on our key relationships. Primarily, those are contracts, contracts with independent contractors, and contracts with employees. But often, you are going to use employment policies, which we will get into later when dealing with employees. We talked about a number of different types of contracts and scenarios where you would use them.

People who are using your services or products. People you are buying services or products from. A landlord where you are paying rent and signing a lease. They are all different types of contracts, and within those, typically all the provisions we talked about are considered for that contract.

Provisions that show up across deals

Now obviously, with a landlord, you are not going to have a non-compete provision because they are not going to compete with you. But all these other terms that we talked about—indemnification, force majeure, jurisdiction, venue, attorney’s fees—all those things typically appear in each one of these contracts.

Decide what to add, remove, or change

And so by now, you, understanding what those provisions are, you can think about which ones would help in your future contracts, which of those provisions are in your current contracts, and maybe they are a problem. So next time you enter a contract for that product or service, maybe you want to negotiate some of those provisions or talk with your attorney about taking those out.

So hopefully, with this knowledge that you have, you now have identified specific terms and conditions relevant to your business that you want to have, remove, or change. And now is a great time to give yourself a little task list. Think about which ones of these could you do on your own? Which ones could you do perhaps with the help of AI? And which ones could you do only with the help of an attorney?

Be the quarterback for your contracts

Obviously, an attorney should help you with all the high-stakes stuff. I don’t trust AI to be perfect, but sometimes when budgets are tight and you don’t have the money to spend a lot on an attorney, it is better to use AI than nothing at all.

So hopefully, you now are empowered essentially as the quarterback, as the commander, knowing the different parts, the different plays, and the different elements that you can now orchestrate to make sure your company has better contracts, less likely to get sued for breach of contract. And if you do have to sue somebody, you will have stronger contract provisions. So either you actually can collect once you win, or you have better leverage when negotiating a settlement or a compromise with another party.

Where to learn more and keep building your knowledge

Now, if you would like to know more about how to avoid trouble like this, I have a free resource at AaronHall.com/free. I provide information for business owners of small to mid sized companies on how to avoid common legal problems. That includes a PDF. It includes videos talking about important issues.

I am Aaron Hall. I am an attorney for business owners and entrepreneurial companies. If you would like, subscribe to this channel so you can get more educational content like this.