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How to Conduct Due Diligence on Your Commercial Lease

Conduct due diligence on your commercial space

Before you sign a commercial lease, you should understand exactly what you’re committing to. For this reason, you will want to conduct thorough due diligence before signing any lease documents. Due diligence is the process of assessing a commercial property and the terms of the agreement.

1. Create a team of experts

Build a team of experts that can help you analyze your lease. Ideally, a reputable tenant representation broker and a real estate attorney are the foundation of that team. These individuals can help you decide if the space is right for your needs.

2. Analyze the market

Before moving into a new space, you should analyze the area to ensure it is a good fit for your business. Take a look at current demographic data and growth projections. You should also evaluate leases of similar properties to make sure the landlord’s offer is in line with current market trends.

3. Conduct due diligence of the space

Conduct due diligence on your commercial space

Start by touring the space thoroughly. Make certain you measure the square footage of the property; you want to ensure you are receiving the amount of space you agreed upon. You can invite third-party experts to determine if the configuration and condition of the space’s wiring, HVAC, columns and other elements will fit your needs.

Evaluate the other tenants in the building to see if they not only will be good neighbors but also if they are good fits for your business. Your accounting firm might benefit from being next door to a lawyer’s office. But what about being next to a veterinarian? Make sure none of the other tenants will turn into competitors.

4. Inquire about fire equipment and fire safety

You shouldn’t overlook the possibility of a fire in the building. Your due diligence process should identify the fire equipment used on the premises and confirm the equipment has met the standards of applicable laws. Don’t hesitate to request assessment reports, statements or compliance certificates for the property and ask for details about how often the fire safety equipment and overall systems are reviewed and serviced.

If you discover any additional work required to ensure that the building complies with any fire safety regulation, this can be a negotiation point to raise with the landlord or agent before occupying the property. Keep in mind that you could be liable for costs to remain compliant with any stipulated fire safety regulation.

5. Analyze your lease

Once you’ve determined the space is right for you, the next step is to go over the lease in detail. Read and analyze every business term as well as all of the legal language to fully understand the document’s significance. If there are attachments to the lease such as building rules and regulations that can have a substantial effect on your tenancy, let your legal team review it carefully.

6. Review other documents thoroughly

Aside from your initial lease document, there are several other documents that require careful analysis as a part of your due diligence. For instance, ask to review the building’s insurance to learn if it will work together with your company’s coverage to protect your employees, belongings and business.

Pay careful attention to the building’s common area maintenance fees to have a precise idea of what your ongoing operating costs will be and what expenses could surface in the future.

Consider due diligence as your first line of defense if you’re looking for a commercial space for your business. Due diligence can be an extensive process, but it can save you from potential problems down the road.

For more due diligence tips, please contact a member of our tenant/buyer representation team.

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