ABA Family Legal Guide

Forming and Operating a Small Business

Starting a Business

Commercial Leases

How do you determine the length of the lease?

In many cases, a new business owner attempts to obtain an initial term of several years at a fixed rental rate. Although this may be advantageous to an existing business owner, it can be disastrous for the new business owner. As mentioned elsewhere, the failure rate for new businesses is very high. If, for whatever reason, the business fails within the first year, for example, and you have an initial term of five years, you are still obligated to pay the rent for the remaining four years. This is true even though you may not be using the rental space.

Consequently, if you decide you want to enter into an initial term for more than one year, you want to make certain you have the right to sublet the premises or, as an alternative, the right to assign the lease to another. Your lawyer should negotiate lease provisions concerning subletting and assignment with the landlord. Your lawyer can also advise you as to what rights you have as a tenant under state law in addition to any rights that may be contained in the lease.

For the new business owner, an alternative may be to lease for one year with an option to renew (discussed in the following sidebar) for a longer period of time.

Remember, businesses can fail for many reasons other than poor business judgment. A poor economy or the death or disability of a key employee or owner can have disastrous consequences when a small business is involved.