Commercial Lease Red Flags: Six Clauses Small Businesses Should Check Before Signing
This page is general information, not legal advice.
A commercial lease often runs for years, and it can cost more than almost anything else your business commits to. Landlords usually start from their own form, and that form protects the landlord. Commercial tenants also tend to get fewer legal protections than residential tenants, so more depends on what the lease itself says. This page covers six clauses that often push cost or risk onto small business tenants. For each one you get an illustrative example, why it matters, and wording you can propose. Commercial leases can often be negotiated, especially before you sign, so treat this as a list of points to raise.
The example clauses below are illustrative. They are not taken from any real landlord's lease.
1. Uncapped CAM and operating expense charges
A typical clause might read: "Tenant shall pay its Proportionate Share of all Operating Expenses, including common area maintenance, insurance, taxes, management fees, capital repairs and such other costs as Landlord may incur in operating the Property."
Why it works against you
Your base rent may look affordable, but common area maintenance (CAM) and other operating costs are added on top, and this clause puts no limit on them. "Such other costs as Landlord may incur" can include roof replacements, upgrades that mainly benefit the landlord, and management fees calculated on the total. Without audit rights you may have no way to check the bill.
What to ask for instead
Sample wording to propose: "Operating Expenses exclude capital improvements, structural repairs, Landlord's financing costs and costs reimbursed by insurance. Increases in controllable Operating Expenses will not exceed 5% per year over the prior year. Tenant may review Landlord's records supporting each annual reconciliation."
2. Unlimited personal guarantee
A typical clause might read: "Guarantor unconditionally guarantees the full and punctual payment and performance of all of Tenant's obligations under this Lease, including any renewals, extensions and amendments."
Why it works against you
You may have set up a company so business debts stay with the business. A personal guarantee gets around that: if the business can't pay, the landlord can come after your personal assets. This version covers the whole term, every renewal, and changes you might never have agreed to as guarantor. On a long lease, that can be a very large sum.
What to ask for instead
Sample wording to propose: "Guarantor's total liability is limited to an amount equal to twelve months of Base Rent. This Guaranty ends after Tenant has paid rent on time for the first 24 months of the Term, and does not cover any renewal or amendment that Guarantor has not signed."
3. Rent escalation with no ceiling
A typical clause might read: "Base Rent shall increase annually on each anniversary of the Commencement Date by the greater of three percent (3%) or the percentage increase in the Consumer Price Index."
Why it works against you
"The greater of" means a fixed increase is the floor, and in years of high inflation the increase is higher still. There is no cap, so you can't predict your costs over the term. Increases also compound, and on top of rising CAM charges the total can grow faster than your revenue. See automatic price increase clauses explained.
What to ask for instead
Sample wording to propose: "Base Rent will increase annually by the lesser of 3% or the percentage increase in the Consumer Price Index, and never by more than 3% in any year."
4. Tenant responsible for all repairs, including major systems
A typical clause might read: "Tenant shall, at its sole cost, maintain, repair and replace the Premises and all systems serving them, including HVAC, plumbing, electrical and roof, in good condition."
Why it works against you
"Repair and replace" can make you pay for a new HVAC unit or roof that will outlast your lease. You could pay for an asset the landlord keeps. If the systems were already old when you moved in, you're taking on the landlord's deferred maintenance. Pair this with a broad indemnity and you may also cover losses you didn't cause. See indemnification clauses explained.
What to ask for instead
Sample wording to propose: "Landlord is responsible for the roof, structure and replacement of building systems. Tenant handles routine maintenance of systems serving only the Premises. Landlord warrants that all systems are in good working order on the Commencement Date."
5. Assignment and subletting at the landlord's sole discretion
A typical clause might read: "Tenant shall not assign this Lease or sublet any part of the Premises without Landlord's prior written consent, which Landlord may withhold in its sole discretion. Any change in control of Tenant shall be deemed an assignment."
Why it works against you
If your business grows, shrinks or gets sold, you may need to hand the lease to someone else. "Sole discretion" lets the landlord say no for any reason, and the change-of-control language can mean selling your company needs the landlord's approval. You could end up paying rent on space you can't use and can't pass on.
What to ask for instead
Sample wording to propose: "Landlord's consent to an assignment or sublease will not be unreasonably withheld, conditioned or delayed. No consent is required for an assignment to an affiliate or to a buyer of substantially all of Tenant's business."
6. Relocation at the landlord's option
A typical clause might read: "Landlord may, upon thirty (30) days' notice, relocate Tenant to other premises within the Property. Tenant shall have no claim against Landlord for any costs or losses arising from such relocation."
Why it works against you
You may have chosen the space for its visibility, foot traffic or layout, and spent money fitting it out. This clause lets the landlord move you somewhere less suitable with little notice, and you pay the moving costs, new signage and lost business. For a shop or restaurant, location is often the business.
What to ask for instead
Sample wording to propose: "Landlord may relocate Tenant only to premises of equal or greater size, visibility and quality, on at least 90 days' notice. Landlord will pay all reasonable relocation costs, including moving, fit-out, signage and printed materials, and Base Rent will not increase."
Also worth a look
Check for renewal options that need notice by a hard deadline, or that renew automatically (see auto-renewal clauses explained). Look at late fees and default terms that let the landlord demand all remaining rent at once (see late payment fee clauses explained). Also check holdover rent, restrictions on how you can use the space, and whether you get an exclusive right to your type of business in the property. How these terms are treated, and how far landlords can enforce them, varies by jurisdiction, so ask a qualified lawyer where the property is located. If you're renting a home rather than business space, see lease agreement red flags.
Scan your own lease free
Every landlord's form is different, and one changed word can change who pays. Paste your commercial lease into the ScanMyTerms lease agreement checker. In about a minute it flags clauses that work against you, with the exact wording and what to ask for instead. The free preview shows the risk count and the first two findings, and the full report is a one-time $5 per document.
This page is general information, not legal advice. For decisions about a specific lease, talk to a qualified lawyer where you live.
Sources
- All clause examples on this page are illustrative and written for this guide. They are not quoted from any real landlord's lease.