Top 5 Red Flags Before Signing a Commercial Lease

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Once you and the property owner reach a deal, the only thing left is to sign the lease. Many investors believe that this part is only a formality because they’ve already reached an agreement that they like, and the only thing left is to make it official.

However, a lot of problems can occur at this stage, and you can encounter a lot of red flags as well that point towards a bad lease. It would take us ages to list all the possibilities, which is why it’s vital for you to always carefully check the commercial lease before signing it. You should get your agent and your lawyer to take a look as well.

Even though many red flags are in the realm of possibility, we still have five we wanted to warn you about, as we firmly believe that they are the most important ones you need to know and avoid. Let’s take a look:

1. Long-term Renewal Clauses

If the commercial lease you need to sign has a clause that commits you to renew it for more than two years at a time, you should avoid it. Otherwise, you should convince the party to consider changing these clauses.

What’s more, the lease shouldn’t last for more than two years. It’s an additional red flag you should be aware of in advance. If the other side wants the lease to last for three to five years, you shouldn’t accept those terms.

2. Perfect-Looking Lease

One of the biggest red flags in this business, and in most others for that matter, is when something looks too perfect. A perfect-looking commercial lease is something you should avoid, as there is a strong possibility that something is wrong with it.

To avoid such leases, it’s best to do thorough research beforehand so you can stop with your negotiations well in advance if there are too many red flags.

3. Relying on Trust Instead of a Legally-Binding Lease

It should go without saying that you should never trust someone to keep their word. If the property owner wants you to take their word for anything instead of having it written down on the lease, you shouldn’t work with them.

Commercial real estate is a business, and it should be treated as such. That’s why no side should have to trust the other — everything must be in writing.

4. Watch Out for Tax Escalation Provisions

Tax escalation provisions exist on most commercial leases, and they entail that the leasee will have to pay additional rent according to changes in the tax rate of the property. They cannot be avoided altogether, but you can always have the base year moved forward and ensure that you pay proportionally to the amount of space you’re renting.

5. Vague Language

Last, but not least, is undoubtedly unclear writing in the lease. Every commercial lease needs to have concrete language that describes how everything about the deal will work and what the obligations and rights of each side are.

All in all, many more red flags exist in commercial real estate deals, and you should always check everything in advance with your agent and lawyer before committing to the deal. For more information, you may reach us at joe@joekillinger.co

Written by

Entrepreneur-Investor-Founder. Posting tips and insights from my experiences in real estate, investing & entrepreneurship- https://www.joekillinger.co/

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