commercial-lease-guide-accessible.pdf

COMMERCIAL

LEASING

Comprehensive Guide to

in New York City

This guide provides basic information to consider before you enter into

a commercial lease in New York City. Topics include location selection,

evaluating space needs, space construction, working with professionals,

reviewing key lease terms, and limiting business and personal risk.

Links to resources are highlighted in blue. Additional resources are at the

end of each section, and a list of all resources are at the end of the guide.

This guide is provided by NYC Department of Small Business Services (SBS).

SBS offers free services to help businesses start, operate, and grow in New

York City. Resources include:

» Commercial lease education courses. To find a course near you, visit:

» Link: nyc.gov/businesscourses

» Assistance with pro bono (free) legal advice, business development,

finance, navigating government, licensing, permits, and inspections

needed to open your business:

» Link: nyc.gov/businesssolutions

» Select Operate & Grow, then select Contact us for more information

» Or Call: 311

The NYC Department of Small Business Services (SBS) helps unlock

economic potential and create economic security for all New Yorkers by

connecting New Yorkers to good jobs, creating stronger businesses, and

building thriving neighborhoods across the five boroughs.

The law firm of Goulston & Storrs PC and Volunteers of Legal Service’s

Microenterprise Project (VOLS) created content for this guide. This guide is

not a substitute for legal or other professional advice. Consult an attorney

and other professional advisors before you sign a commercial lease.

ABOUT

THIS GUIDE

Definitions are located on

sidebars and are highlighted

in purple.

CONTENTS

Planning

4 The Location

7 The Space

Team of Professionals

Lease Basics

13 Lease Process

13 Request for Proposals

13 Letter of Intent or Term Sheet

14 The Lease

14 Assignment & Subleasing

Terms of the Lease

Limiting Business & Personal Risk

22 Tenant Entity

22 Guaranty

23 Insurance

23 Indemnification Provisions

23 Contingency Termination Provisions

Altering the Space

End of Lease

29 Lease Renewal

29 Default on the Lease

Real Estate Broker or Tenant Representative 10

chitect 10

Engineer 11

Contractor 11

Lawyer 11

Base Rent 16

Additional Rent 17

Lease Term 17

Renewal Options 18

Permitted Use 18

Utilities & Services 19

Security Deposit 20

Initial Alterations 25

Rent Abatement 26

Permits & Licenses 26

Building Codes 26

Alterations During the Term 26

Returning the Space to the Landlord 27

Summary & Takeaways

Commercial Leasing Do’s and Don’ts 31

Sample Timeline 31

Checklist & Additional Resources 33

Glossary of Legal Terms 36

Section Name

PLANNING

Planning

THE LOCATION

Selecting the right location is an important decision that can affect the success

or failure of your business. Below are questions to consider when looking

for the location that best suits your business. These questions can apply to

office, retail, or industrial businesses.

Who are my customers? Where do they live, work or shop?

Identify who your customers are, and research where they are located. Select

a business location near people who will buy your products or services.

Is location important to my employees?

Consider if a location is convenient and accessible for employees.

Do my customers or employees need easy access to public

transportation or parking?

Not all customers and employees will be within walking distance of your

location. Locating your business near public transportation or parking

facilities can help attract customers.

How close do I need to be to my suppliers? Will delivery trucks need

easy access to my business?

If you need frequent deliveries, your business may need to be located near

suppliers. Easy access to loading and unloading areas may also be important.

Do I need to be on a busy street where many potential customers will pass

by my business? Or will my customers seek out and visit my business?

If you expect customers to buy your products without planning in advance,

you may want to locate your business where a large number of people will

pass by. If customers will seek you out, you can be in a less travelled location.

Spend time around the space and its neighborhood on different days of the

week to observe the amount of traffic.

Examples of businesses

that need street trafﬁc

Examples of

destination businesses

Convenience store

Grocery store

Restaurant

Nail salon

Specialty store

(such as a bridal shop)

Doctor’s office

Signing a commercial lease can be one of the most significant and expensive choices that you

can make as a business owner. Investing the time to create a plan will give your business an

advantage. This section presents some important considerations when developing your plan.

Planning

Would other businesses nearby attract customers to my business?

If so, what type of businesses?

Locating near similar businesses can attract customers who are already

visiting other nearby businesses. If you want to attract a specific group of

customers, you may want a location near other businesses that target and

appeal to the same group. For example, if you want to sell specialty foods

imported from Latin America, you may want to locate near businesses that

sell different items also imported from that region.

Is the area growing or declining in population and businesses?

It can be an advantage to locate in neighborhoods experiencing population

and businesses growth. If commercial activity is decreasing, you may have

difficulty building a sufficient customer base.

Is a desired area too expensive for my business?

Even if a location seems perfect, the rent may be higher than your business

can afford. Before you decide on a location, create a budget for your business,

and determine what you can afford.

Is my business permitted in the desired area?

New York City laws may prohibit your type of business from operating in

a specific area or building. Every property has its own zoning designation.

This can mean that your planned use of a space may not be allowed. If

you find a space like this, you can seek a zoning variance that will allow for

that use. However, the process to acquire one requires significant money

and time. To learn if you can get a variance, contact the NYC Board of

Standards and Appeals by going to nyc.gov/bsa.

To view the zoning restrictions for a property, visit NYCityMap:

» Link: nyc.gov/citymap

» Enter address at top

» Zoning information is on right panel under Building & Property Information

Who can help you answer these questions?

»» People who operate a business in a similar industry

»» Businesses in the neighborhood you would like to move into

»» Trade associations

»» Local development organizations

(such as Business Improvement Districts (BIDs) throughout the city)

»» Merchants Associations

Search online for organizations in your neighborhood. It is important to

consult with experienced professionals (see page 10). They can provide

answers to questions and guide you through the leasing process.

Zoning Designation: New York City

limits the uses of areas through

numerous “zoning districts”

throughout the city. The most

common zoning districts the

City designates are residential,

commercial, and manufacturing.

Zoning designation can also limit

building features in a district,

such as its height and signage.

Zoning Variance: the City can give

permission for owners or tenants to

use a property for a purpose outside

the zoning laws.

Business Improvement District:

A geographical area where local

stakeholders oversee and fund the

maintenance, improvement, and

promotion of their commercial district.

Merchant Association: A group of

business owners working together

to support and promote businesses

in a particular commercial area.

Planning

ADDITIONAL RESOURCES

For an interactive map with data from New York City agencies, visit NYCityMap:

View information about the neighborhood:

» Link: nyc.gov/citymap

» Enter address at top

» View information on right panel under Searched Locations

View neighborhood demographics (population, ages, etc.):

» Select Other Map Themes (upper right)

» Select NYC Census FactFinder

View nearby transportation, parks, schools, senior centers, etc.:

» Select Show Additional Data on Map (right panel)

View building, landlord name, building violations, inspections, and zoning:

» View information on right panel under Searched Locations

For additional zoning information, visit Department of City Planning (DCP):

» Link: nyc.gov/planning

» Select Zoning

For a list of Business Improvement Districts (BIDs):

» Link: nyc.gov/biddirectory

EXERCISE: LOCATION NEEDS AND PRIORITIES

Make a list of your business needs for a location. Assign a number based on its importance.

Since you may not find a location that suits all of your needs, prioritizing your needs is important.

To succeed my business needs: Priority (1, 2, 3)

Planning

THE SPACE

Once you select a location, you can determine your space requirements.

Consider these questions:

How much space do you need?

Different types of businesses need different amounts of space. You want

only enough space to meet the needs of customers and to manage your

operations. Unused or unnecessary space means unnecessary costs.

Is the layout important?

Some businesses or offices may need a large open area. Other businesses

may need multiple offices or separate rooms. For example, if you plan to

open a clothing store, a space with a large open area can help customers

see and navigate your entire selection. If your employees need privacy for

phone calls or meetings, you may need a space with separate offices or the

ability to add cubicles.

Do I need lots of windows?

Spaces with few or no windows, or windows that do not face the street, are

usually less expensive.

Do I need to be on the ground floor?

If you want customers to find and visit your business by seeing it on the street,

a ground floor spaces with windows may be a good choice, even though

they are usually more expensive. Second floor spaces are better for

businesses whose customers are more likely to seek the business out.

For example, if your business is an office or expects customers to make

appointments, a second floor location may be the better choice.

Do I need space for storage?

Using commercial space for storage can be expensive. Basements can be

a less expensive place for storage. Off-site storage facilities can also be a

cheaper option than using commercial space for storage, but will take time

and money to move items to and from the storage facility.

Do I need the ability to add space in the future?

It is not easy to predict how well your business will do. You may want to

start with a smaller space with the option to expand in the future if your

business grows. You may wish to negotiate an option in your lease to rent

space next to yours if it becomes available.

Do I want a space already set up for my type of business?

Or am I willing to change it to my specifications?

Construction takes time and can be expensive. This is especially true if the

space will need structural changes, such as building or removing walls. If

you find a space that fits your needs and does not need much work, you will

save time and money.

What utilities does my business need?

Make sure the location has access to enough electricity, natural gas, water,

and internet access to run all of your equipment.

Does my business need special equipment?

For example, a restaurant may need refrigerators, ovens, and grease traps.

Some spaces, such as a previous restaurant location, may already have the

equipment you need. This will save you the cost of buying new equipment

and connecting the equipment to building systems.

Building Systems: These may

include electrical, plumbing, gas, or

air conditioning (HVAC) systems.

Did you know?

Businesses located in New York City

are eligible for a wide variety of

incentive programs, including tax

benefits, energy incentives, and

wage benefits.

SBS offers one-on-one consultations

to help small business owners identify

City, State, and Federal incentives.

To learn more, visit nyc.gov/incentives.

Planning

Is the building structurally sound with no leaks?

Inspect the space for any signs of problems such as large cracks or water

damages. If you see a reason for concern, ask a professional, such as an

architect, contractor, or engineer, to inspect the space.

Will I need to remove asbestos, mold or other hazardous materials

before I can occupy the space?

Renting a space with hazardous materials that must be removed will increase

the cost of preparing the space. Older spaces may contain asbestos, a fire-

proofing material that is a health hazard. The law requires asbestos to be

removed in a specific way that can increase the cost of renovation. Speak

to a licensed professional to find out if the space has hazardous materials.

Can I lease an occupied space and wait for the current tenant to leave?

Or do I need the space immediately?

A landlord will want to lease a space to a new tenant before the current tenant

moves out, which ensures a steady income for the landlord. It is possible,

however, that the current tenant may not leave when its lease term ends. The

landlord can bring a lawsuit against the holdover tenant, but it may be weeks

or months before the space is available. If you already signed the lease, you

are required to take the space and start making rent payments once the space

is available. To protect yourself, include a lease provision that allows you to

cancel the lease if the space is not available by a certain date.

Do I want a direct lease with the landlord? Or will I accept a sublease

from an existing tenant?

In some cases, commercial tenants can choose to lease their space to

a secondary tenant through a sublease. These “primary tenants” act as

“sublandlords.” If you sign a sublease, be aware that any violations by your

sublandlord can lead to the landlord terminating your sublease. If you are

paying rent to the sublandlord but the sublandlord fails to pay rent to the

landlord, the landlord can evict you.

Whichever option you choose, be sure you know whether you are leasing

directly from the landlord or from a tenant. You can check the identity of the

landlord on the NYCityMap.

Does the Certificate of Occupancy (CO) for the building allow my use?

How you use the space must comply with the legal uses allowed by the

building’s CO. For example, if you rent a space for a yoga studio and the CO

says the space can only be used as an office, your use is not permitted. For

your use to be legal, you will need to change the CO. Some landlords may

not allow you to change the CO, and making changes can be expensive.

Buildings built before 1938 may not have a CO. If this is the case, it is

important to speak with a lawyer about your options.

ADDITIONAL RESOURCES

To view a building’s Certificate of Occupancy, visit NYCityMap:

» Link: nyc.gov/citymap

» Enter address at top

» View information on right panel under Searched Locations

» Under Building and Property Information, select Building Profile

Holdover Tenant: A tenant that

does not leave the property after

its lease ends.

Sublease: An agreement in which

tenant leases property from another

tenant (or “sublandlord”) instead of

from the landlord directly.

Certificates of Occupancy (CO):

Issued by NYC Department of

Buildings (DOB), which states a

building’s legal use and/or type of

permitted occupancy. It is illegal to

occupy a building before the DOB

issues a CO or Temporary CO.

Section Name

TEAM OF

PROFESSIONALS

Team of Professionals

REAL ESTATE BROKER OR

TENANT REPRESENTATIVE

Purpose: Brokers and tenant representatives will show you potential spaces

based on your desired location and space. They can offer information about

the space’s surrounding neighborhood, provide expertise on what parts of the

lease the landlord may negotiate, and insight on how the landlord operates.

Timing: Look for a broker or tenant representative when you know your

desired neighborhood(s) and are ready to look at potential spaces.

Where to find: Ask for recommendations from other business owners, trade

associations, and local real estate broker association.

To check whether a real estate broker is licensed:

» Link: dos.ny.gov/licensing

» Select Search Licensees, then select Real Estate Industry

Cost (Broker): The broker is only paid if the tenant signs the lease. The

landlord usually pays a commission to the broker that is a percentage of the

annual rent or equal to a number of months’ rent. The amount depends on the

length of the lease, the location, and the broker. The percentage usually varies

over the course of the lease (e.g. for a five-year lease, the broker could be

paid 5% of the first year’s base rent, and 4% for the second through fifth years).

Cost (Tenant Representative): A tenant representative only represents your

interests and not the landlord’s interests. You pay a flat fee whether or not

you sign a lease.

ARCHITECT

Purpose: An architect can help determine the space and layout your

business needs, create a plan for the space, and make sure your space

complies with building codes and other requirements. The architect can also

supervise construction to ensure it is done according to the plans.

Timing: If you need to renovate the space, look for an architect before

you sign the lease.

Where to find: Other business owners, broker or tenant representative.

Cost: Typically, the architect is paid a fixed fee.

If possible, consult with professionals from the start because they can help answer many questions

and help negotiate a lease that protects your interests. It means more costs at the beginning, but

will save money in the future. You can find professionals to help you at no or low cost. For each

specialty, be sure to interview several professionals and hire the one who best suits your needs.

Below are types of professionals you may want on your team.

Team of Professionals

ENGINEER

Purpose: An engineer helps determine whether the space has the technical

requirements your business needs. This is necessary if your business

requires alterations to the building systems or structure. For example, some

businesses may need special air conditioning or electrical systems.

Timing: If your business requires alterations to the building systems or

structure, you should work with an engineer before you sign the lease.

Where to find: Your architect, broker, or tenant representative.

Cost: Typically, the engineer is paid a fixed fee.

CONTRACTOR

Purpose: The contractor will construct your space according to the building

plans created by your architect and/or engineer. They can make cosmetic

repairs and alterations such as painting, repairing minor electric and

plumbing problems, installing new floors, and building countertops.

The landlord often requires a licensed contractor to make alterations to

electrical, gas, and plumbing systems. Most licenses are issued by the

NYC Department of Buildings.

To confirm whether a contractor is licensed, visit: nyc.gov/buildings

» Select Business, then select Business Resources (on right)

» Select Licensing Information (on left), then online search tool

Timing: If construction will change the building’s structure or utility systems,

you may need to hire a contractor after the architect develops plans. If the

alterations are mainly cosmetic, you may not need an architect and can hire

a contractor after you sign the lease.

Where to find: Your broker, tenant representative, architect, engineer,

or landlord.

Cost: Contractors are typically paid either by a fixed fee or a percentage of

the cost of the work.

LAWYER

Purpose: The lawyer is your legal representative and is critical to protecting

your rights. A lawyer reviews the lease to determine your responsibilities

and liabilities under the lease. They can negotiate contracts with both the

landlord and other professionals.

Timing: It is important to engage a lawyer early in the process, especially

before you sign the lease. Even if your broker or tenant representative is

negotiating the basic terms of the lease, a lawyer has additional expertise

that can make the lease negotiation easier and faster.

Where to find: SBS staff can assess your lease needs and connect you to a

pro bono lawyer for free legal consultation and lease review.

» Link: nyc.gov/LegalAssistance

Section Name

LEASE BASICS

Lease Basics

Residential Leases

Commercial Leases

LEASE PROCESS

This section gives an overview of each step towards signing a commercial

lease. Depending on the size of the space, the length of the lease, and how

the landlord usually handles leases, you may not follow each of these steps.

REQUEST FOR PROPOSALS

Your broker or tenant representative will help you identify a desired location

and the type of space you need. The broker will then gather information or

proposals from multiple landlords for you to compare. Proposals usually include

basic terms, including length of the lease, base rent, any additional rent,

utilities, security deposit, and possibly other items discussed in detail below.

LETTER OF INTENT OR TERM SHEET

After gathering proposals, consulting with professionals, and discussions with

landlords, decide which space you want. The next step is often to prepare a

letter of intent, also called a term sheet, with the landlord. The letter of intent

contains basic terms of the lease, such as rent amount, length of the lease,

and security deposit that you and the landlord agreed to. The letter of intent

is generally not a contract. Do not make payments to the landlord or start

alterations before the lease is signed. Many important terms are on the lease

itself. Once the term sheet is agreed upon, the landlord will usually have its

lawyer prepare the lease.

Consult with your broker and lawyer before signing a letter of intent. It is

important to include terms that are important to you because the landlord

may not renegotiate those terms during lease negotiations. If the landlord

will not agree to terms you need to operate your business, the space may not

be a good fit for your business. Knowing this will save time and money

negotiating a lease you won’t sign.

For small spaces or short-term leases, the landlord may choose to skip a

letter of intent and move right to the lease negotiation.

Letter of Intent: A letter between

the tenant and the landlord that

states the basic terms of the lease

(ex. length, amount, construction)

and that the tenant and landlord

intend to enter into a lease together.

A lease is an agreement between a landlord and a tenant that allows a tenant to occupy a space for

a certain amount of time. Commercial leases and residential leases have important differences.

»» A tenant’s rights are almost all governed by

the lease.

Example: Unless it is required by the lease,

the landlord is not required to make repairs or

provide heat

»» When the lease ends, the law does not limit

how much the landlord can increase the rent.

»» The landlord is not obligated by law to renew

the lease.

VS.

»» Residential tenants have protections under

the law.

Example: The landlord is required to make

repairs and provide heat.

»» If an apartment is regulated, landlords are

limited by how much they can increase rent.

»» If an apartment is regulated, landlords must

offer to renew the lease.

Lease Basics

THE LEASE

The landlord will usually propose the first version or draft of the lease. Many

commercial landlords use a template or form lease. The lease can be difficult

to understand because of the way it is written, the length, and the small

print. This version will usually heavily favor the landlord.

The lease should include the terms included in the term sheet but will contain

many other important provisions. Carefully review the lease with a lawyer so

they can explain your rights and obligations and help negotiate favorable

terms for you.

You can negotiate changes to the landlord’s offered lease terms. Write changes

on the lease or add them in a separate document, called a “rider.” The rider

is attached to the lease and contains terms that add, clarify, or replace terms

in the form lease.

You may only be able to negotiate a few changes to the landlord’s offered

terms. If your lease is for a small space, the landlord may be reluctant to

make many changes to its lease. It is critical that professionals explain what

these terms mean for your business.

The written lease will govern your relationship with the landlord. Do not

depend on oral statements from the landlord. Everything you agree to

with the landlord should be written in the lease. If a term is not included in

the lease, it has no effect.

ASSIGNMENT & SUBLEASING

Even with careful planning, you may decide it is best for your business to

move to a different space, maybe larger or smaller, or in another location,

before the lease ends. Or you may decide you need to share the space with

another tenant to help you pay the rent. You may also choose to close your

business during the lease term.

To reduce personal and business liability, you may want another business

to take over your lease by assigning or subleasing the space to them. You

can negotiate and include in the lease to have the right to assign the lease

or sublet the space. Most landlords will only permit an assignment or sublet

with its prior written consent. You can, however, negotiate a provision in the

lease that requires the landlord to be reasonable in giving its consent.

Whether you assign the lease or sublet the space, you still have obligations

and liabilities under the lease. If the new tenant fails to pay rent, you, the

original tenant, will be responsible for the unpaid rent. The same is true if a

subtenant does not pay rent.

Landlords will sometimes allow assignments or subleases to companies that

are affiliated with the original tenant. For example, if you sell your business to a

new owner who continues to operate the business with no substantial changes.

Assignment of a Lease: An

arrangement in which the rights

and obligations of the original

tenant are transferred to the new

tenant. The new tenant pays rent

to the landlord.

Sublease: An arrangement in which

the tenant rents its space to a

subtenant. The subtenant pays rent

to the tenant. The original tenant

remains the tenant under the lease

and pays rent to the landlord.

Section Name

TERMS OF

THE LEASE

Terms of Lease

The basic financial terms of the lease may have a significant effect on your business’s success.

These terms include the base rent, additional rent, length of the lease, permitted uses, and utilities.

BASE RENT

Rent is often divided into separate categories. Base rent is the minimum rent

that the tenant owes the landlord each month for occupying the space.

Base rent is usually calculated as an annual amount. The amount is determined

by multiplying the size of the space by a dollar amount. This is what “rent per

square foot” means. The rent per square foot is generally determined by the

market. The landlord will charge what other landlords are charging for similar

space in similar areas. The size of the space is usually the square footage of

the space plus a portion of common areas, such as common hallways or

bathrooms. The addition of this common space turns the “usable” area of the

space into the “rentable” area. The rentable area is then multiplied by the dollar

amount per square foot to determine the base rent.

Usable Area:

Entrance

Your

Space

Common

Hallway

Other

Tenant

Rentable Area:

Entrance

Your

Space

Common

Hallway

Other

Tenant

EXERCISE: CALCULATING BASE RENT

Square footage of usable area

Your portion of square footage of common area

Price Per

Square Foot

Base

Rent

Example Rent Calculation

An office space has 1,000 square feet (sq. ft.) of usable area. The rent is $50 per square foot. The tenant is

also responsible for 10% of 1,000 square feet of common space.

1. Calculate your share of the common area:

Square footage of common area Your portion of the common area

Your share of common area

1,000 sq. ft

0.10

100 sq. ft.

(10% of common area)

2. Calculate the rentable area:

Square footage of useable area Your sq. ft. portion of the common area

Rentable area

1,000 sq. ft.

100 sq. ft.

1,100 sq. ft.

3. Calculate the total yearly rent:

Rentable area Price per square foot

Total yearly rent

1,100 sq. ft.

$50 sq. ft.

$55,000

The yearly base rent is $55,000. The monthly rent is $4,583.33.

Usable vs. Rentable Area: The

usable area is the space that you

control. Rentable area includes the

usable area plus a portion of the

common areas.

TIP: Measure the space yourself

(or ask your architect) so you know

the exact amount of usable area.

To determine the rentable area, ask

the broker or landlord which spaces

are common areas, their square

footage, and the percentage you

will need to pay.

Terms of Lease

ADDITIONAL RENT

The landlord will likely require you to pay costs in addition to the base rent.

This is because the landlord’s own expenses, such as the property’s

operating expenses and real estate taxes, will likely increase over time, and

landlords generally prefer for tenants to cover a part of these expenses.

The additional rent takes various forms. Your lease may make you responsible

for paying one or a combination of the following:

1. A share of the increase in operating expenses;

2. A share of the increase in real estate taxes;

3. A fixed annual percentage increase of the base rent (e.g. 3% each year); or

4. An additional rent increase based on some other measure

(e.g. increased wages for building staff).

To plan for these expenses, ask the landlord or broker for an estimate of

additional costs.

To find past real estate tax assessments, visit NYCityMap:

» Link: nyc.gov/citymap

» Enter address at top

» On right panel under Building & Property Information,

select Tax & Property Records

Short-Term vs. Long Term-Leases

Short-Term

(5 years or less)

Advantages

»» Limits the length of your obligation if the business

does not succeed or you decide to move.

Disadvantages

»» No guarantee that the landlord will renew the lease.

»» If you will pay a substantial amount to alter the

space, you may not want a short term lease in

case the landlord chooses not to renew the lease.

Takeaway

A short-term lease may be a good option for a new

business or a business that is less certain whether

they will be successful.

Long-Term

(more than 5 years, often 10+ years)

Advantages

»» Provides the stability of knowing that your

business will have a space, and your base rent

will not increase for a long period of time.

Disadvantages

»» You are responsible for the rent for a longer period

of time even if your business fails or you want to

move to another location.

Takeaway

A long-term lease may be a good option for an

established business that has a history of success

and believes it will operate for many years.

Operating Expenses: A landlord

spends a certain amount of money

per year operating a building. This

includes maintaining and insuring

the building. The landlord looks to

tenants to recover these costs.

Real Estate Taxes: Property

taxes that the landlord owes

to New York City.

LEASE TERM

The lease term is the period of time you are allowed to occupy the space. There are several factors to consider

when deciding on a lease term.

Terms of Lease

RENEWAL OPTIONS

Commercial landlords are not required to renew your lease. Once your

lease ends, the landlord is also permitted to ask for any amount of rent.

Protect yourself against a high increase by negotiating for an option to renew

in your lease. Options for how to determine the increased rent include a

fixed rent increase or a “market” base rent, also called fair market rent.

Fixed rent is a fixed amount your rent will increase each year. Typically the

increase is 2-3% each year.

Fair market rent is determined by looking at similar prices to rent in the

same area. Consider asking the landlord to set a limit to the increase. The

limit could be a fixed amount or a percentage of fair market rent (e.g. 90%

or 95%). If you and the landlord cannot agree on the fair market rent, it is

typical to designate a neutral broker or appraiser to determine the market rate.

If your lease does not have an option to renew and you want to stay in your

space, contact your landlord well before your term will end to request that

they renew the lease. If you are a good tenant, the landlord may be motivated

to extend the term at a reasonable rent.

How can I be a good commercial tenant?

»ü Pay your rent on time each month

»ü Do not violate the lease

»ü Be respectful of neighbors, especially regarding noise

»ü Quickly contact the landlord when building systems need repair,

such as a leaking roof or burst pipe

PERMITTED USE

The lease describes how your business can use the space. It is important

that the lease has a clear statement of which type(s) of business(es) may

operate in the space. This is called the “permitted use.”

For a retail business, the lease should permit your specific use, but the

landlord should allow a reasonable expansion of the use. For example, if

you operate a pizza parlor, you may want the option to expand into a full

service restaurant with the right to sell alcoholic beverages. In this case, the

permitted use provision should say “restaurant” and not specifically “pizza

parlor.” For an office business, the lease can allow for any office use.

Sometimes retail businesses will include “exclusives” in the lease. These

“exclusives” prohibit the landlord from renting another space in the building

to a similar type of business. For example, in a shopping center or mall

where landlords want a variety of businesses, the landlord may be more

restrictive about the types of businesses. Most landlords, however, will

resist giving a tenant an exclusive unless it is a large tenant.

Option to Renew: Tenant has the

option to renew at the end of the

lease. The most common commercial

lease term is 10 years with an option

to renew for another 5 years.

Permitted Use: The part of the

lease that describes the types of

uses permitted in the space.

Terms of Lease

A landlord is only responsible for providing utilities and services agreed to in the lease. Your lease should provide

electricity, water, heating, air conditioning, passenger and freight elevator service (unless you are on the ground

floor), and potentially gas, cleaning, and directory listings.

Costs

The landlord usually provides heating and air conditioning

either through a building system or a unit only for your

space. The landlord is only required to operate the

building-wide heating and air conditioning systems

during hours stated in the lease. If you require these

systems to operate after those hours, you need

to notify the landlord, who will usually charge an

overtime charge.

If heating and air conditioning is provided through a unit

that only serves your space, you will usually control

the hours you use the unit. However, you will likely be

required to repair, maintain, and replace the unit.

Interruptions

The lease can also address how quickly a landlord must

respond to utility interruptions they cause. If the leased

space is small, most landlords will not agree to a specific

time period. In a large space lease, you may be able to

negotiate a time period that the landlord must respond

to the interruption. Three (3) to ten (10) days is typical.

You can negotiate a reduction in rent payment until the

problem is fixed if the landlord does not fix the issue

within the time period.

In some cases, you may also be able to negotiate

for the right to terminate the lease if the interruption

continues for a much longer period, typically 30 days.

The landlord will usually limit these rights to interruptions

that are the fault of the landlord and not the utility company.

UTILITY CHARGES & SERVICES

When comparing and deciding among spaces, the method of paying for

utilities is an important cost factor.

Electricity: The primary utility expense is electricity. You will typically pay for

electricity as a separate and additional charge from the rent. There are two

different ways you, the tenant, can pay for electricity:

1. Direct meter – You obtain electricity directly from the utility company.

This is usually the least expensive option and is called “direct meter.”

2. Submeter – The landlord charges you based on your actual usage, as

measured by a “submeter.” The landlord reads the meter and directly bills

you. The cost is based upon utility company charges the landlord plus

an additional administrative charge. If a submeter is installed, the lease

should state who is responsible for the cost of installation.

Other Utilities: Water, sewage, heat, and gas are less costly and are usually

charged by a fixed amount or by meter. If usage is low, such as normal

bathroom usage, the landlord may cover that cost in the base rent or will

determine a fixed charge. If usage is high, the landlord may not want to take

the risk of a fixed charge, so will measure and charge you for actual usage.

Direct Meter: A main (master)

meter installed by the utility

company that measures the

tenant’s usage.

Submeter: A secondary meter

that the landlord uses to measure

and bill the tenant for their usage.

Terms of Lease

SECURITY DEPOSIT

The landlord will generally require you to pay a security deposit when you sign

the lease. Discuss the security deposit if you have the option at the term sheet

stage. The security deposit protects the landlord if you fail to pay rent or

violate the lease. The security deposit is refundable, but the landlord will

hold the deposit on your behalf during the term of the lease. The landlord

may deposit the money in a bank account that earns interest. In such case,

you may receive the interest when the landlord returns the security deposit.

The amount of the security deposit is based upon several factors:

1. Amount of the base rent

2. Your business’s financial condition. If your business has little or no financial

history, or have limited access to cash or credit, the security deposit may

be quite large. In this case, the landlord may be willing to negotiate returning

part of the security deposit after a few years if your business is successful.

3. Whether you provided a guaranty (discussed on next page).

The security deposit is usually equal to a number of months’ rent. The number

of months is commonly two, but it depends on factors listed above. The

landlord may also require a letter of credit from an acceptable bank as the

security deposit instead of or in addition to cash.

At the end of the lease term, the landlord should refund the security deposit

if you leave the space in the condition required by the lease, and do not owe

the landlord any money under the lease. The landlord will usually refund the

security deposit 30 to 45 days after you vacate the space.

Letter of credit: A document through

which the bank guarantees they

will pay the security deposit if the

tenant is unable. The bank charges

a fee and may require collateral,

such as a mortgage on your home.

Section Name

LIMITING

BUSINESS &

PERSONAL RISK

Limiting Business & Personal Risk

Default: A violation of your

responsibilities under the lease.

TENANT ENTITY

If you have a business entity, such as a corporation or a limited liability

company (LLC), you can sign the lease as the business to avoid personal

liability. The business, not you, is the tenant and is called a tenant entity.

Ideally, the tenant entity would be separate from your main business entity,

and its sole purpose would be to sign the lease.

The advantage of a tenant entity is that claims by the landlord or a third party

against the tenant are generally limited to that entity. The disadvantage is

that entities can be expensive to set up and maintain. A tenant entity with

low financial worth will require a significant security deposit. It can also

require a personal guaranty, which will place personal liability on you.

GUARANTY

Even if the business entity is the tenant according to the lease, a landlord may

require you, the business owner, to provide a personal guaranty. This means

you agree to be personally responsible for obligations under the lease. A

guaranty of all of obligations of the tenant is considered a “full guaranty.” A

“good guy guaranty” is a “partial guaranty.”

Whether the landlord will require a guaranty depends on these factors:

1. The financial condition of the tenant entity. If the business is new and has

no history or financial worth, the landlord will likely require a guaranty. If the

business has high financial worth, the landlord may not require a guaranty.

2. The amount of the security deposit. If you are able to provide a large

security deposit, the landlord may not require a guaranty.

If a full guaranty is not required, the landlord may still require a “good guy

guaranty.” If the tenant entity (e.g. the business) defaults under the lease and

vacates the space, the guarantor (e.g. the business owner) is not personally

responsible for the rent for the time after you vacate. The tenant entity that

signed the lease, however, can still be responsible for the remaining rent.

If any of the following provisions are in a lease, it does not have a true

“good guy guaranty.” Avoid provisions that would require you to:

1. Pay the entire balance of unpaid rent under the lease (“accelerated rent”);

2. Make extra repairs or improvements (“performance obligations”); or

3. Repay the landlord for any tenant improvement allowance, rent

abatement/free rent, or real estate broker’s commission.

Financial Worth: Calculated by

adding the value of business assets

and property and subtracting

liabilities and debts.

Tenant Entity: An entity you create

that will be the tenant under the lease.

Good Guy Guaranty: The guarantor

is personally responsible while the

business is operating in the space.

Once the space is vacated, they

are no longer personally liable.

This section includes the most important ways to limit your business and personal risk in

regards to a commercial lease. A combination of these will likely be necessary to adequately

protect you and your business. The landlord will also try to limit its risk around the points below,

so careful negotiation of each is important.

Limiting Business & Personal Risk

INSURANCE

Insurance limits your risk by protecting your business against claims for

personal injury or property loss. Your landlord will likely require you to maintain

insurance. At a minimum, you will usually need commercial general liability

insurance and personal property insurance. If your business is in a flood

zone, you may also need to purchase flood insurance. Speak to a licensed

insurance broker about the types of insurance to best protect your business.

Your landlord may require you to name additional insured parties on your

policy including the landlord, property manager, and mortgage lender of

the landlord. This protects additional insured parties if a claim against them

is your fault as the tenant.

Additionally, obtain business interruption insurance to cover lost income if

your business is closed temporarily because of damage to your space. Such

insurance may only cover damages that result from some accidents and not

others. Review provisions thoroughly before making a decision.

INDEMNIFICATION PROVISIONS

Leases contain indemnification provisions which determine who is

responsible when there is an incident in your space and on the property.

Generally, these are incidents that result in injury or damage.

The landlord does not want to be responsible for anything that occurs inside

your space. You do not want to be responsible for anything that occurs on

the property outside your space. To address these concerns, leases should

contain indemnification provisions.

The landlord should agree to protect you against claims from incidents that

occur in areas of the property it controls. Exceptions are those incidents

that are your fault. For example, if you spill water in a shared elevator and

someone slips and falls, you will be liable for the personal injury claim.

As the tenant, you protect the landlord against claims from incidents that

occur inside your space. Exceptions are those incidents that are the

landlord’s fault. For example, if the landlord makes a negligent repair in your

space and someone is injured, the landlord will be responsible.

CONTINGENCY TERMINATION PROVISIONS

If your business requires a certain license or permit, consider including

a contingency provision. This is the right to end the lease early if you are

not able to get the license or permit despite reasonable efforts. Examples

include liquor licenses, day care licenses, and certificates of occupancy.

The landlord will likely require you to show proof of reasonable efforts to

obtain the license or permit. This may mean working with a professional to

apply for the permit or license, submitting an application to the appropriate

agency, and tracking your communications with the agency.

ADDITIONAL RESOURCES

SBS staff can help you find a lawyer to help you with creating a business

entity. To learn more, visit: nyc.gov/LegalAssistance

To check an insurance broker’s license, visit: dfs.ny.gov

» Select Consumers then Insurance Products

» Select Producer/Licensee Search (at bottom)

Commercial General Liability

Insurance: Protects your business

from lawsuits for physical injuries.

Property insurance: Covers

damage to personal property and

to the space when caused by fire,

theft, vandalism, or some natural

weather events.

Indemnification: Agreement by a

person or entity to be responsible

for loss or damage.

Section Name

ALTERING

THE SPACE

Altering Space

It is rare for a space to meet all of your needs without some

alterations. During the term of the lease, you may also want the

ability to further alter the space.

INITIAL ALTERATIONS:

WHO PERFORMS AND WHO PAYS?

When evaluating a space, consider how much time and money alterations will

require and when you can begin operating. Here are some questions to consider:

»» What is the estimated cost of the alterations?

»» When would I like to start using the space? When do I need to start using

the space?

»» How long will it take the architect and engineer to prepare alteration plans?

»» How long will it take the landlord to review plans?

»» What governmental permits and approvals are needed before beginning

construction? How long will it take to get all required permits and approvals?

»» Are there any special approvals I must obtain that could extend the

approval process?

»» Will I need approval from the Landmarks Preservation Commission,

co-op board, or condominium association?

»» When will the space be available to begin construction?

»» How long will it take to build out the space?

»» Do I need to get any approvals from governmental agencies upon

completion of the work, but before occupying the space?

»» What will happen if there are construction delays and I am unable to

open on time?

»» Once construction in the space is complete, how long will it take to

prepare the space to operate my business? Do I need to factor in time

to stock the space?

In many leases, a landlord will only perform minimal alterations to the space

before the tenant moves in. Examples include putting up walls if a large space

is split into smaller units or repairs to building systems. You will usually be

responsible for other desired alterations such as floor and wall coverings. If you

need extensive alterations, negotiate these terms at the term sheet stage.

If substantial alterations to the space are needed, decide whether you or the

landlord will perform the work and who will pay. A common option is the

landlord makes the alterations and you pay part of the expense. If you make

the alterations, the landlord may provide a tenant improvement allowance to

cover some or all of the costs.

If the landlord makes substantial alterations, you can negotiate the right to

review and approve the plans. If you make the alterations, the landlord will

want to review and approve the plans. The landlord may charge a fee to

review construction plans or supervise work. You can negotiate a limit to

how much the landlord can charge and require the landlord to review the

plans in a reasonable time period.

Tenant Improvement Allowance:

Amount the landlord is willing to

pay for initial alterations.

Altering Space

RENT ABATEMENT

If you need time to make alterations, the landlord will often agree to a

rent abatement. A rent abatement applies to a period of time at the

beginning of the lease when no rent is due. Rent abatements are common

and best discussed with the landlord during the term sheet stage.

PERMITS & LICENSES

Before beginning significant alterations, you may need to obtain permits

and approvals from governmental agencies. Your licensed professionals will

determine which permits are necessary for the work and will prepare and

submit the applications for permits and approvals on your behalf.

SBS can help facilitate licensing, permitting, and inspections needed

to open your business. To make an appointment, call 311 or visit

nyc.gov/businesssolutions.

To learn more about permits and approvals, visit: nyc.gov/NavigatingGov.

BUILDING CODES

Require the landlord to deliver the space in compliance with all applicable

laws. Certain governmental agencies may not permit alterations to start

until the space complies. Any time you make alterations to the space, the

landlord will require the alterations to comply with the law.

If your space is open to the public, you will likely need to comply with

Americans with Disabilities Act. An architect can help you understand

these requirements.

Some types of businesses may have additional building code requirements.

For example, day care centers must follow specific rules about the number

and height of toilets and sinks. The NYC Department of Buildings, your

architect, engineer, or code consultant can help determine these requirements.

ALTERATIONS DURING THE TERM

Most landlords will allow you to make cosmetic or decorative alterations to

the space without its approval. There will often be a limit to the cost and type

of alterations you can make. While painting and installing wall or floor coverings

are unlikely to require landlords’ approval, most others will. This should be

written in the lease. The landlord will always require review and approval of

alterations that require a permit or affect any building systems.

Americans with Disabilities Act

(ADA): The ADA is a law that

prohibits discrimination against

people with disabilities, making

sure spaces open to the public

are accessible to the disabled.

Altering Space

RETURNING THE SPACE TO THE LANDLORD

Most leases require the space to be left in good condition, free of personal

property, swept with a broom (“broom-clean”), and with certain tenant

alterations removed. Avoid any agreement to restore the space to its original

condition. Your lease should allow for reasonable wear and tear.

The lease may require you to remove certain “specialty alterations” (such

as kitchens, staircases, and showers) at the end of the lease. A landlord

will often agree that you should only remove an alteration if it was required

when the alteration was approved. You will usually be required to repair any

damage caused by the removal of your property and alterations.

Unless otherwise written in the lease, you must remove all furniture at the

end of the lease. Usually a landlord will require you to leave all fixtures, but

generally trade fixtures remain your property. This should be written in the lease.

Any furniture or personal items left at the end of the term become the property

of your landlord, or the landlord may charge you to remove them.

ADDITIONAL RESOURCES

To see whether a building is landmarked, visit: nyc.gov/landmarks

» Enter the building address under Landmark Search

For information on permits and buildings codes, visit: nyc.gov/buildings

» Select Codes

Fixture: Anything you attach to

the property that is fixed in place

and would damage the property

if removed (ex. counter).

Trade Fixture: Personal property

used for a business purpose and

detachable from the space

(ex. soda machine).

Section Name

END OF LEASE

End of Lease

It is equally important to review the lease when you end it as when

you sign it. Know what your obligations are when returning the

space to the landlord, including any alterations that need to be

removed or repairs needed.

LEASE RENEWAL

Landlords are not required by law to renew a lease or engage in renewal

negotiations unless it is specified in the lease. New York also does not

have commercial rent regulation, which means landlords can raise the

rent however much they want in the renewal offer, unless there are

specific renewal provisions in the lease.

DEFAULT ON THE LEASE

A default occurs when a landlord or tenant violates the lease. Examples

of default include failure to pay rent or utilities, placement of a lien on the

property, or cases when the tenant abandons the space.

You can negotiate a provision in the lease that requires the landlord to provide

written notice of any default. This can include the opportunity to cure, or fix,

the default. Landlords are less likely to agree to provide notice of defaults on

rent payments since you know when the rent is due and whether you paid.

Landlords are more likely to agree to provide notice of failure to make a

required repair. Depending on the type of repair, they usually give you 15

to 30 days to complete the repair.

A court will not extend a commercial lease after it is terminated. You may,

however, have some legal protections that will allow you to delay a termination

and cure (fix) the default. If you receive notice of default, consult an attorney

immediately because options are time-sensitive.

ADDITIONAL RESOURCES

For information on finding an attorney, visit: nyc.gov/LegalAssistance

Lien: Claim against a property

for an unpaid debt. For example,

a construction company may

place a lien against the property

during a payment dispute.

SUMMARY &

TAKEAWAYS

Summary & Takeaways

Careful planning with a team of professionals when choosing a space and signing a lease is

critical to a business’s success. Once you are ready to negotiate the term sheet and lease,

you must understand all of the terms, including your responsibilities and the landlord’s. When

preparing your negotiation, determine the most important concerns for your business and

consider what you can and cannot accept in a lease.

COMMERCIAL LEASING

DO’S AND DON’TS

Don’t

ü Identify what your business needs in a space and

what you can afford before you sign a lease.

ü Work with professionals (brokers and tenant

representatives, lawyers, architects, and engineers).

ü Consider the complexity and timing of build-out

when deciding the start date of a lease term.

ü Determine whether your business will need

special licenses or permits to operate.

ü Negotiate a lease term that guarantees the

option to renew.

ü Figure out how much additional rent you

will need to pay.

ü Consider negotiating a “good guy guaranty”

to reduce your liability.

ü Be clear who is responsible for expenses

and liabilities.

ü Buy insurance.

»û Rely on oral agreements or a letter of intent.

»û Sign a “standard lease” without understanding

your responsibilities.

»û Sign a lease without trying to negotiate terms

more favorable to you.

»û Sign the lease in your own name without conditions.

»û Trust the landlord knows the space’s permitted

uses and restrictions.

»û Assume the landlord is required to make repairs

or provide heat, water, electric, or other utilities

free of charge.

Summary & Takeaways

SAMPLE TIMELINE

Timing of the commercial lease process will depend on factors discussed in this guide.

Factors include the type and size of space, extent of alterations, and types of permits needed.

Below is a sample timeline of the process from start to finish.

Note this is a sample:

»» Your process may be longer or shorter.

»» You may not need each step.

»» You may not need to complete each step in this order.

»» Some steps can be completed at the same time.

The right column of the timeline is blank for you to estimate how long each step may take.

Steps toward opening your business Time estimate

Consider and research what your business will need from a location and space

Interview and decide on a real estate broker and/or tenant representative

Look at potential spaces and choose ones that meet most of your needs

Ask broker for proposed basic lease terms

Hire an architect and/or engineer

Consult with the architect/engineer about whether the space will work for you

Interview and hire a lawyer

Draft a term sheet with the landlord

Architect draws up plans for the space

Research insurance options and costs

Negotiate and sign the lease

Review architect plans and submit them to the landlord for review

If you need a government permit to make the alterations, hire a code consultant

Submit plans to NYC Department of Buildings

After approval, interview and hire a contractor

Construction (this will vary significantly)

If necessary, schedule inspections

Minor and decorative alterations, move-in furniture

Summary & Takeaways

CHECKLIST & ADDITIONAL RESOURCES

SBS help businesses start, operate, and grow by:

»» Connecting entrepreneurs to free resources ranging from business courses to legal services

»» Explaining government rules and regulations

»» Helping entrepreneurs apply for funding to launch or grow a business

GETTING STARTED

£Learn about free resources and classes for small business owners in NYC.

NYC Department of Small Business Services (SBS)

» Link: nyc.gov/sbs

£Find a commercial lease education course:

» Link: nyc.gov/businesscourses

£ For assistance with pro bono legal consultations for commercial leases, contracts, business

development, finance, navigating government, licensing, permits, and inspections contact SBS:

» Link: nyc.gov/businesssolutions

» Select Operate & Grow, then select Contact us for more information

» Or Call: 311

£ Learn about licenses, permits, certifications, and regulations:

» Link: nyc.gov/business

» Select Start a Business

£ Find out if you qualify for City, State, or Federal Government incentives:

» Link: nyc.gov/incentives

LEASING COMMERCIAL SPACE

£Research the neighborhood:

NYC Business Atlas

» Link: maps.nyc.gov/businessatlas

NYCityMap

» Link: nyc.gov/citymap

£Engage a real estate broker, and verify they are licensed:

NYS Department of State Division of Licensing Services

» Link: dos.ny.gov/licensing

» Select Search Licensees, then select Real Estate Industry

£ Check the Certificate of Occupancy, including the building’s

legal use and/or type of permitted occupancy:

NYC Buildings

» Link: nyc.gov/buildings

NYCityMap

» Link: nyc.gov/citymap

» Enter address at top

» View information on right panel under Searched Locations

» Under Building and Property Information, select Building Profile

Summary & Takeaways

£ Determine the zoning designation of the property you want to lease

and verify applicable zoning restrictions:

NYC Buildings

» Link: nyc.gov/buildings

NYCityMap

» Link: nyc.gov/citymap

» Enter address at top

» Zoning information is on right panel under Building & Property Information

£Check landlord identity and building and property information:

NYCityMap

» Link: nyc.gov/citymap

» Enter address at top

£Determine if property tax is due on the building:

NYC Finance

» Link: nyc.gov/finance

» Select Property Records

NYCityMap

» Link: nyc.gov/citymap

» Enter address at top

» Select Tax and Property Records (right bottom)

£ Have the lease reviewed by an attorney. SBS staff can connect you to a

pro bono attorney for free assistance with the lease:

NYC Department of Small Business Services (SBS)

» Link: nyc.gov/LegalAssistance

£ Consider creating an entity that will be the tenant on the lease:

NYS Department of State

» Link: dos.ny.gov/corps

SBS staff can connect you to a pro bono attorney for free assistance with

entity formation:

NYC Department of Small Business Services (SBS)

» Link: nyc.gov/LegalAssistance

£ Check a insurance broker’s license before purchasing commercial

general liability insurance and property insurance:

NYS Financial Services

» Link: dfs.ny.gov

» Select Consumers, then select Insurance Products

» Select Producer/Licensee Search (at bottom)

Summary & Takeaways

CONSTRUCTION

£ Identify and engage professional assistance from architect, contractor, and/or engineer.

See pages 10-11.

£ Check if a contractor is licensed:

NYC Department of Buildings

» Link: nyc.gov/buildings

» Select Business, then select Business Resources (on right)

» Select Licensing Information (on left)

» Select Online Search Tool

£ Have a professional review the lease to ensure construction plans are permitted. See pages 10-11.

£ Have a professional submit construction plans to landlord if required by the lease.

£ Have a professional submit applications to relevant government agencies.