The ins and outs of salon lease agreements

What is a salon lease agreement?

A salon lease agreement is a legally binding contractual document between a landlord and a tenant (in this case, the owner of a salon). The lease outlines specific terms and conditions for occupying a commercial space, which ultimately impacts the operations of the business. Salon lease agreements are essentially commercial leases but have some conditions imposed on them by state law. For example, many states (like Michigan) currently allow for either month-to-month applications or 2-year leases under state law. These intervals are longer than most residential leases.
A salon lease is oftentimes seen as a sublease or a license to operate a salon in a retail space . However, not all salon tenants want to be seen as subtenants of the landlord’s other tenants. For that reason, it is advisable to negotiate the lease with an emphasis on the amount of control over the space, with the end goal being that they are tenants and not subtenants.
It is important that salon owners read the proposed lease agreement carefully and compare it to what they discussed in price and terms with the landlord before signing. If there are any discrepancies between what was discussed with the landlord and what is in writing, be sure to contact the landlord to clear up the issue.

Key components of a salon lease

Essential clauses should be included in a lease for a salon. Rental terms for your suite, such as the amount of rent, duration of lease and whether there is an option to renew. Maintenance responsibilities of the suite and common areas should also be detailed. Who is responsible for repairs and how quickly must those repairs be addressed? Are any major improvements being made to the suite and common areas? Is there language that covers if one of the parties selling its business, going into bankruptcy or has a lien on its property? If the landlord sells its property could the lease be terminated and what steps would be taken prior to termination? Does the lease address responsibility for obtaining certificate of insurance? Is there a requirement to obtain a new license to practice hairdressing if a new salon name is being used? Are there rules associated with advertised specials? These are only some of the concerns that should be addressed in a salon lease. A potential tenant should engage counsel to assist with negotiating the lease and a landlord should seek the assistance of counsel for drafting and negotiation.

Negotiating a salon lease

For many hair and beauty salon owners, leases constitute a substantial investment, both in terms of cash outlay and time spent. Given the importance of a commercial lease agreement, it is worth making sure you understand how to effectively negotiate the key points. Though painting all negotiation points with the same brush is ill advised (what may work for one business may not work for another), knowing what matters most to you, your employees, and your clients is crucial in any negotiation.
The following are some examples of the types of issues or provisions that may be up for negotiation when it comes to a hair and beauty salon lease:
In the end, the most effective lease negotiations occur when both parties are respectful, understanding, and patient with one another. For hair and beauty salon owners, having legal representation throughout the negotiation process is critical. Only a qualified attorney can help you make proper sense of the lease provisions, ensuring you are making sound decisions that will suitably protect your best interests.

Mistakes to avoid with a salon lease

From my experience, I have seen potential lessees frequently make the following mistakes:

• Not thinking through and discussing the terms of the salon lease prior to having a final draft of the lease. Not being prepared is a recipe for disaster. You may overlook important details in the lease. For instance: Have the landlords and potential lessees discussed the first month’s rent and security deposit? Has the landlord provided you with any pictures, diagrams or plans for the salon? If you don’t focus on these important details early, too much time will pass between the parties and due diligence may result in the landlord increasing the rent, etc.
• Starting to negotiate with the landlord prior to understanding all of the terms and conditions of the lease. It is unwise to start to negotiate the terms of the lease prior to receiving a copy of the lease, particularly when the lease is written by the landlord.
• Assuming that the Salon will be completed by the landlord according to the lessee’s specifications. Always ask the landlord for copies of plans, diagrams or photographs showing what the property looks like and what the configuration will be once the work is completed. This is especially important if you’re relocating an existing salon. You should always inspect the space yourself. Pictures and diagrams can be altered. The designs may not meet your approval. If there are any problems, speak up and rectify any desired changes, preferably before you sign the lease.
• Neglecting to obtain as much information as possible about the property, such as health department certificates and certificates of occupancy. The tenant should always request these documents and keep in mind that almost every state requires that these be submitted to the Secretary of State prior to opening a salon.
• Signing an incomplete lease, with the understanding that the landlord would "add in" certain terms later. Once the lease is signed, the lessee is usually bound. I have seen too many lessees in this situation, including one who did not receive his security deposit back because he was late with the first two months’ rent. In this situation, the lease was written in pencil and no copies were made.

How to work with legal help

In the long run, it pays to have a professional review any legal document you are signing. In the case of a salon lease agreement, you will want your lawyer to review the lease, prepare the sublease agreement and conduct ancillary legal work that may be necessary such as drafting the operating agreement for a limited liability company or partnership.
Of course you could just sign the lease and sublease agreements yourself, but there is ample reason why you should have a professional – whether a lawyer or other licensed professional – review both documents. First, your general commercial real estate broker is not allowed to give legal advice and may lack the training necessary to interpret legal terms in a way that is beneficial to you. So that is not an option. Second, while your lawyer may charge you $200- $350 an hour to review the lease agreement (or about $300-$600 if you have a flat fee retainer), a dispute over the sublease may end up costing you tens of thousands of dollars to litigate the matter through the court system. Furthermore , if you have to file for bankruptcy or a judgment is obtained against you by the landlord or a third-party, the expenses associated with the legal process can climb into the hundreds of thousands of dollars and last for many years. It is very easy not to consider this fact when you are presented with a lease agreement. Most people think that the lease has no effect on them until they actually start working at the salon. Several months into their rental agreement, a dispute arises. At this point you may be told about the tenant’s obligation to pay for the landlord’s attorney fees as well as their own. A broken mirror or chair, an alleged incident of violence or threats of violence, or an alleged violation of zoning ordinances are some of the more common examples that lead to litigation in the salon and may put your rights as a tenant in jeopardy. Your attorney can help you mitigate this risk by advising you on how to limit your exposure under the lease agreement.

Options for renewal and termination

The renewal and termination options are critically important for your salon lease because it puts you in a position of strength. For instance, a termination option will give you the ability to leave the lease early. Conversely, a renewal option will give you the ability to re-new the lease on favorable terms if the fair market rental value in your area increases dramatically after you’ve signed the lease. Both the renewal and termination options will provide you flexibility to enhance the value of your salon lease. As a result I recommend you have both types of options in your lease.

Resolving a lease dispute

The most common cause of disputes with a salon lease is with respect to rent calculation or measuring square footage. The lease will typically have a formula for calculating the rent that is based on a percentage of gross revenues or revenues minus a percentage allocated for product sales, etc. The lease will define "gross revenues", but it may or may not have the same definition as required by the applicable department of revenue or state board of barbering and cosmetology. It is important to read the definition carefully to make sure that the intent is clear if there is any ambiguity.
There are often disagreements over the method of computing a lease termination or expiration date. A late or early termination or notice of expiration can have a substantial financial impact on the cost of moving. The standard lease should have a lease term that is clearly defined, not just a renewal term or rollover, but it should describe the lease term and when it commences so that the period of time for determining the termination date is clear. There have also been disputes regarding whether notice was given by the landlord or tenant. Make sure that any notice is clear and unambiguous since the consequences of an improperly given notice are rather drastic, particularly to the tenant’s business. Any properly issued notice should probably confirm that notice has been properly terminated under the terms of the lease.
Some landlords try to take a more circumspect approach to lease termination rather than terminating the lease outright. They may try to make conditions so onerous that the tenant will leave voluntarily rather than endure the conditions set forth in the lease. As soon as a lease has been terminated, the parties’ rights have been established and it leaves each of them with a clean slate. For whatever reason, when a party is induced to leave premises under circumstances where it actually was not required to do so, the landlord has the ability to get a new tenant at market rates or a tenant who has less need for the space and is not subject to the landlord’s leverage at the end of a stale lease. The tenant may have some exposure depending on any tenant improvement or fit-up money the tenant may have received under the lease or other relocation costs. However , if the tenant is forced out, the tenant will have an easy road to claim damages.
If the landlord is in the business of developing residential apartments, there may be a tenant relocation payment obligation by the landlord. Most states have some requirements for tenant relocation payments of existing commercial tenants. The parties may consider whether there is a renewal term but no termination date. The landlord probably wants to lease the space for as long as possible, but the tenant may want a lease commitment for a shorter period of time. The parties must consider how the renewal will be triggered and the tenant’s right under the renewal terms. In certain situations, the tenant may also want to secure the right to renew the lease including, if possible, first refusal rights to purchase the space or premises rather than a simple renewal right.
If a dispute arises once the parties have followed the lease termination procedure, it would be best to follow the dispute resolution procedure outlined in the lease. Most leases have a dispute resolution procedure. It is important to have a clear indication of what will occur at the expiration of the lease with the most detail given to the lease termination procedure so that the party that will look to enforce the lease can do so with a minimum of risk. A well-drafted lease will provide a lengthy dispute resolution procedure, with varying forms of resolution in a tiered system. These procedures should also detail the form and timing of notices and a mechanism for communication between the parties.
If the tenant does not have right to arbitration, the tenant might not want to pursue litigation for a single issue. It may consider sending a letter expressing its viewpoint and attaching evidence that might support the position it wishes to take in the future. The tenant could offer to mediate the dispute, which, if unsuccessful, would give the tenant an argument that the parties had attempted to resolve the dispute without litigation, while also suggesting a friendly atmosphere between the parties.