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Commercial Leasing: Due Diligence Required

On Behalf of | May 18, 2022 | Uncategorized

Leasing commercial space is an exciting yet nerve-racking experience. It is natural to be cautious when entering into such a longterm financial commitment. You have just located a terrific location to commence or continue your business operations and you are setting up for a successful five to ten year run in this prospective space. Much, if not all of that enthusiasm will vanish as you start to wade through the lease agreement prepared by the landlord. These documents are thick, and are filled with fine print and clauses and concepts that you have never thought of, let alone tried to understand. We once waded through three single-spaced pages setting forth the ‘method and manner’ for calculating the “electricity surcharges and apportionment” for a 1500 square foot lease in a twenty story commercial building. Your landlord’s proposed lease will ensure them ‘zero’ liability, obligation, or responsibility, for everything under the sun which, in turn means that you- the tenant will have 100% of the liabilities, obligations and responsibilities for everything that touches and concerns the space, and that effect the building. Luckily you hired a terrific lawyer Who has done what he or she can to apportion the risk more evenly between you and the landlord, and smoothed out the real nasty provisions. So you can sleep at night, right? Not yet….

Due diligence requires more than simply reviewing and hammering out the lease. Because the tenants will be responsible for some if not all of the fixtures, systems, equipment, and services in the space, we always recommend that our clients hire an engineer to perform a thorough inspection of the commercial premises, the building, as well as, the fixtures, appliances, equipment, and systems that service your space, and in some instances the building. After all, if the landlord is making you 50-100% responsible for the repair, maintenance, and replacement of the plumbing, HVAC, sprinkler, and electrical systems, you better know what shape, condition, and level of operability those systems are in before you take responsibility for them. Don’t stop there….

Your architect should also perform their due diligence in the space before you agree to sign the lease. Your architect should be able to confirm that the space can accommodate your proposed alterations and anticipated usage of the space. The location of structural walls or the location of utilities may substantially impact the viability of your business or add extra expenses to work around structural problems. Between your engineer and architect you should ensure that there is ample electricity supply, heating and cooling, and water service to conduct your business. Please don’t be the tenant that takes a space only to learn that there is insufficient electric current to operate your business, or the plumbing system is not adequate for your proposed restaurant kitchen. You will likely be the one paying to upgrade the systems that service your premises and when your lease term is over all the brand new electric equipment and plumbing work that you paid for will become the property of the landlord. Are we done yet? Not yet….

Be sure your attorney, architect, and engineer search the building and your space on the Department of Buildings website (in New York City, outside of the City you will have to check with your municipal building department). The B.I.S. system in New York City provides terrific insight into the building and the premises. If there are open violations, complaints about the building, open building permits, no certificate of occupancy, or elevator violations, you will know about them before you enter into the lease agreement. All of this information also lends a great deal of insight into the type of landlord and managing agent running the building. A clean bill of health at D.O.B is generally a sign that the parties across the table from you are on the up and up.

Performing your due diligence is the sure way to avoid devastating impacts to your business and your livelihood.