Succeeding
In Your Business: Learning to Love Your Landlord
Cliff
Ennico
"I'm starting a new retail
business in my community. I've formed a limited liability
company (LLC), and found what I think is a really excellent
space, but the landlord wants me to commit to a ten-year
lease. If I break the lease, I have to continue paying rent
until he finds another tenant for the space, and if he can't
get the same rent I was paying, I'll have to pay the
difference between what I paid and what the new tenant is
paying for the remainder of the 10-year term! What's more,
I'm being asked to personally guarantee my LLC's obligations
under the lease, so my house is at risk. Now, I really think
this business is going to be successful, but it's a new type
of business for my community, and I want to hedge my bets
with the landlord in case the business goes under. Are there
any ways to do this that won't cost me the lease?"
Generally, landlords do not like surprises from their
tenants. What they want is to get their rent check every
month, on time. If they do, life is beautiful. If they
don't, life is hell. Landlords do not want to have to spend
money turning their properties over every two or three
years. They want long-term commitments, and to be protected
in case rental rates crash while your lease is in effect.
The provision you mention, requiring you to guarantee your
rent for the remainder of the 10-year term if you break the
lease, is a very standard one -- in fact, I see it in just
about every lease I review for my clients.
Having said that, there are some things you can do to limit
your liability. Many landlords will agree to an "early
termination" clause allowing you to surrender the lease
before the 10-year term is up, on the following conditions:
You have to be in the space a certain period of time
(usually three years) before you can terminate the lease
early; there must be no defaults in the payment of rent
during those three years; you must give the landlord 90 to
180 days' notice of your intent to terminate early; and the
landlord will keep your security deposit.
If your landlord won't accept that solution, then try to
limit your personal guaranty. Since you only recently formed
your LLC, there is no way any landlord will rely on its
creditworthiness -- they will want you on the hook
personally, because that's where the assets are. Once you
are in the space at least three years, however, things
change -- your LLC will have a "net worth" of its own to
support the lease, and assuming you've always paid your rent
on time, the landlord will know you are a "good person" and
won't be as worried about you defaulting.
Consider asking your landlord for a clause eliminating your
personal guaranty after the first three years of the lease
term, as long as there are no defaults under the lease. Your
LLC will still be on the hook for the full 10-year term, but
you won't have to worry about losing your house if the
business fails.
If the landlord still won't bite, ask for a five-year lease,
with a five-year optional renewal period (rather than a
10-year fixed term). It doesn't get you off the hook, but it
will cut your potential exposure in half.
"I'm getting ready to sign a lease for my service business.
The landlord wants the first month's rent up front and a
two-month security deposit, both of which are fine with me.
But the broker tells me the landlord wants an extra $30,000
up front as 'key money.' The lease says nothing about this.
What is key money, and is it legal?"
"Key money" is a form of extortion -- if you fail to make
the payment, you don't get the keys, get it? Think of key
money as a second brokerage commission you pay to the
landlord on top of your broker's commission, and you've got
the idea. Sadly, key money is not only legal, but common
practice in some states.
Requiring a tenant to pay key money to secure a lease may be
an "unfair trade practice" in your state -- ask a good
business lawyer to look into this, as your real estate
lawyer may not be familiar with unfair trade statutes. If
there's no way for you to legally challenge the key money
payment, figure out how long it will take you to recoup the
payment if your business is successful. If this is a highly
desirable location, and there's a good chance you will
recoup the payment in a short period of time ... well, as
Tony Soprano would say, "If ya want the good stuff, ya gotta
pay the price."
Cliff Ennico (cennico@legalcareer.com) is a syndicated
columnist, author and host of the PBS television series
"Money Hunt." His latest books are "Small Business Survival
Guide" (Adams Media, $12.95) and "The eBay Seller's Tax and
Legal Answer Book" (AMACOM, $19.95). This column is no
substitute for legal, tax or financial advice, which can be
furnished only by a qualified professional licensed in your
state. To find out more about Cliff Ennico and other
Creators Syndicate writers and cartoonists, visit our Web
page at
www.creators.com.
Copyright 2008 Creators
Syndicate Inc.
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