Competitive rental rates and attractive incentives may lure the home office entrepreneur to an outside office and the owner/manager of a small business to a newer or bigger commercial space. But before you sign on the line, keep in mind that a lease is a contract.

As lessor, make sure that the contract outlines all of your needs and be sure to read the fine print carefully. Of course, as with any contract, you are well advised to have your lawyer review the lease before you sign it to make sure you fully understand your and the lessor's obligations.

Here are a few areas to consider:

• If your business is just starting out, consider whether your business can afford to be locked into a long-term lease or whether a shorter one or two year lease would be more advantageous. Keep in mind, however, that the longer term leases are usually less expensive and provide for the continuity of location.
  
• Consider both your present and future needs such as: number of people working in the area, office space, entrance, warehousing/storage space, sales volume, and expansion.
  
• If possible, have the lease between your limited company and the lessor. Unless absolutely impossible to avoid, owner/managers should not personally guarantee a business lease. At the very least, attempt to place a limit to any guarantee. A personal guarantee could result in personal assets being attached should the business suffer an economic downturn.
  
• If you are in a partnership, consider whether you will be able to carry the lease by yourself if the partnership ceases. Will the partner who leaves be required to continue to pay? A cross agreement could protect your own financial position.
  
• If the owner/manager becomes terminally ill or dies and the business suffers a dramatic slowdown, can the lease be terminated? Ensure that the lease contains a clause providing protection for the tenant.
  
• Determine if co-tenants can be contracted to reduce costs.
  
• Responsibility for leasehold improvements should be specifically considered. Usually, a new tenant is required to pay for these although during these economic times, tenants are receiving substantial incentives from landlords. And, in many circumstances, the landlord will require that the leasehold improvements must be completed by them. This can be an expensive proposition that should be determined and agreed to specifically before the lease agreement is signed.
  

In particular, consider requirements such as electrical outlets, partition walls, flooring, carpets, special ventilation, heating or cooling systems, and access doors. If and when the business vacates the premises, will you be required to restore these improvements to the original state? The word "rent" to most implies the monthly payment, but in the world of leasing, rent may take many forms. Basic rent is calculated as dollars per square foot. Additional occupancy costs are usually factored into the contract using such terms as "net lease" or "triple net", none of which may be dollar quantifiable unless a full definition is available.

At the first of each year, the occupancy costs for the common area, such as repairs, security, property taxes, insurance, heating, and property management are calculated on a dollars per square foot basis. In many instances, especially in new buildings or in buildings that are poorly managed, a low basic rent may be a "loss leader". Negotiate firmly on the occupancy cost clause to ensure that you limit your occupancy expenses into the future. Simply imagine the shock to your bottom line if the occupancy cost of $2.50/sq ft is suddenly increased to $5.50/sq ft.

• Make sure the lease defines specifically what items are of a maintenance nature, normally the lessee's responsibility, as opposed to a capital expenditure, which would usually be the landlord's responsibility.
  
• Can the business assign or transfer the lease to a purchaser of the business? Often the landlord will want to negotiate the lease directly with the prospective purchaser and will include this clause in the lease. Should you ever want to sell the business, this clause could be a negative factor for the potential purchaser.
  
• Consider whether an exclusivity clause should be contained in the contract. Competition may be healthy, but six businesses in the same location offering the same product or service that you offer may not be.
  
• Making the public aware of a service or business may require strong visibility or a specific franchise logo. If so, ensure that both the lease and the municipal bylaws will permit the size or colour of the required signage. It may be advisable to include a clause that stipulates that the landlord allows the specific sign size and presentation you require.
  
• In addition to all the conditions that should be considered and included in a lease, a major consideration should be whether the business can sustain the cashflow required to meet the monthly rent. Logan Katz LLP Chartered Accountants can help you prepare cash and profit forecasts for the first two years of the lease, for example, to ensure that the business will support the cost of leasing the location.
  

Please contact us should you wish to discuss these issues further.

The above provides general information only. It should not be regarded or relied upon as accounting or taxation advice or opinions. Logan Katz LLP Chartered Accountants would be pleased to provide more information or specific advice on matters of interest to you.

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