A few missteps during lease negotiations can easily put you out of business

Jacob Healy felt pretty confident negotiating a lease for a second Toronto location of his Golden Gecko Coffee concept, so much so he didn’t bother getting a lawyer involved.

“The lease on my first store on Jane Street was very detailed and about 20 pages in long,” he said. “At the time, I thought it was painful and excessive, and was so iron clad and detailed it left no room for negotiations.”

As a result of that experience, Healy was thrilled when the lease he was presented with for the new location was much shorter.

“The terms were loose, and there weren’t a lot of details,” he said. “I remember thinking this is pretty amazing.”

In hindsight, that was a mistake.

“The killer was that I didn’t double check what was reasonable for that neighbourhood,” Healy said. “The location wasn’t right on Bloor, but I was being charged Bloor Street rates.”

Another problem was that after signing the lease, the landlord decided to rent out the basement space that had been promised to him.

“The initial offer had the basement in there. After the fact, it was removed and I didn’t notice that,” Healy said. “What I ended up getting for the dollar value didn’t add up anymore.”

Healy was fortunate that he and the landlord came to an amicable parting of the ways.

“We discussed what would be fair and reasonable, so I paid three months in advance and called it quits.”

But the experience has not stopped Healy from considering another project.

“I will do it again, but definitely the way I did the first lease,” he said. “I learned a lot from this whole experience.”

Not every small business owner can negotiate their way out of such a situation like Healy did. In many cases, a few missteps during lease negotiations can easily put you out of business.

A big error is overlooking any differences between the offer to lease and the actual lease agreement, said Olivier Fuldauer, a lawyer at Aarbo Fuldauer LLP in Calgary.

“A lot of times you end up signing a one- or two-page offer to lease before you sign the 30- to 40-page document,” he said.

The offer should have essential information on basics such as lease terms, operating costs, personal guarantees and tenant and landlord improvements.

“You need to make sure that when you sign the lease, that information is the same,” Fuldauer said. “It’s easy to overlook things, because lease agreements can be mind bogglingly complicated and boring.”

He also advises carefully reviewing the document for any potential additions, such as management fees.

“Really try to examine those and decide if they are appropriate in terms of what they do for that fee, which can run from 10 to 20 per cent,” Fuldauer said. “A mall with 100 tenants absolutely needs management services. But I’ve seen charges for a building with one or two tenants and the landlord basically does nothing.”

Another piece of advice is to file a caveat that alerts any future buyers of the building of the lease.

“If you don’t file a caveat to put future buyers on notice, then you don’t have a lease with the new owner and could get kicked out,” he said.

Other factors to review are subletting and assignment rights subject to the landlord’s approval.

“If you might sell or move your business other than when the lease term ends, you want that in there,” Fuldauer said. “Be clear on what the conditions are for approval.”

Depending on the demand in an area, he said, businesses might be able to negotiate a free period at the start of the lease, especially if landlords think they need an incentive to attract tenants or get them to sign a longer lease.

Another possible negotiating point is tenant improvement budgets.

“When entering an initial lease or renewal, it’s always worth asking to see if the landlord will contribute to some of those improvements to the property,” Fuldauer. “After all, they will belong to the landlord when they’re done.”

One thing is certain: doing the due diligence on a lease can save startups considerable grief over the long term, even though it may seem overwhelming.

“Your negotiating power is severely curtailed once you sign that commercial lease agreement,” Fuldauer said. “So it’s important to consult with lawyers before you sign, because there’s a lot of money on the line.”

Financial Post

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