Commercial lease essentialsCommercial Leases in Illinois
For investors opening a restaurant, retail store, office or warehouse business, a commercial lease is often the first large contract they sign in the United States. It determines the enterprise’s fixed costs, location and exit costs, and it is also one of the key documents in an E-2 application for proving that funds have been “irrevocably committed.” This article focuses on Illinois and covers the main lease terms and how they connect to E-2 review. Leasing law in other states differs and must be reviewed by local counsel.
Legal background for Illinois commercial leases
- Written form: Under the Illinois Frauds Act (740 ILCS 80/2), a lease for a term of more than one year should be signed in writing or it may be unenforceable. In practice, commercial leases should always be in writing, and oral promises should be written into the contract.
- Limits on exculpatory clauses: Under 765 ILCS 705/1, a lease clause exempting the landlord from liability for personal injury or property damage caused by the landlord’s own negligence is void; but the section expressly allows non-residential leases to exempt the landlord from liability for property damage. In other words, a commercial lease clause stating that “the landlord is not responsible for loss of your equipment or inventory” is usually valid, and you need your own insurance to cover it.
- Nonpayment and recovering possession: Before terminating a lease for nonpayment of rent, the landlord must give written demand allowing not less than 5 days to pay (735 ILCS 5/9-209); recovering the premises requires a court eviction proceeding (735 ILCS 5/9-101 et seq.), and the landlord cannot simply change the locks.
- Landlord’s duty to mitigate: 735 ILCS 5/9-213.1 requires the landlord to take reasonable measures to mitigate damages after a tenant’s default (for example, by re-letting). However, in Takiff Properties Group v. GTI Life (2018), the Illinois Appellate Court held that a commercial tenant can waive this protection by contract, so check carefully whether the lease contains such a provision.
- Security deposits: Illinois statutes on the return of and interest on security deposits, and Chicago’s residential landlord and tenant ordinance, apply to residential tenancies. The amount, deductions and timing of return of a commercial security deposit depend essentially on the lease.
Main provisions and negotiation points
| Provision | What it covers | Negotiation points |
|---|---|---|
| Term and renewal option | The initial term, and the number and length of renewal terms the tenant may elect | How renewal rent is set (fixed increase or market rate), and how far in advance written notice is required to exercise a renewal |
| Rent structure | Gross lease: rent includes taxes and insurance; net lease, commonly a triple-net lease (NNN): the tenant separately shares property taxes, insurance and maintenance costs | Ask about the “total cost,” not just base rent; annual increases; when the free rent period starts |
| Common area maintenance (CAM) | Common-area costs in shopping centers and office buildings, shared pro rata | Which costs can be included, whether there is a cap, whether you can audit; whether capital expenditures are passed through to the tenant |
| Security deposit and credit support | Cash security deposit, letter of credit | Conditions and timing for return; whether the deposit can be reduced after a number of years of on-time rent |
| Personal guarantee | The investor personally guarantees the company’s lease obligations | Seek a capped guarantee, a guarantee of only a certain number of months’ rent, or a step-down release after half the term; see below |
| Use clause and zoning | The permitted business uses of the premises; whether you have exclusive use | Write the use broadly enough to cover all the business in your business plan; confirm that zoning, parking and building codes allow that use |
| Build-out and TI allowance (tenant improvement allowance) | Who is responsible for build-out, how much improvement allowance the landlord provides, the delivery condition (as-is or “white box”) | Scope of work, approval process, who bears cost overruns; whether you must restore the premises when you move out |
| Sublease and assignment | Whether the tenant can transfer the lease to someone else or assign it when selling the business | Landlord consent “not to be unreasonably withheld”; whether a sale of the business or a change in company ownership is treated as an assignment |
| Repair responsibilities | Who repairs and replaces the roof, structure, heating and air conditioning (HVAC), and plumbing and electrical systems | Under a net lease the tenant’s responsibilities are often heavy; inspect the condition of the equipment first and set out the landlord’s responsibility for the structure and major systems |
| Insurance and releases | Liability and property insurance the tenant must carry, mutual releases (waiver of subrogation) | Insurance requirements that fit the actual business; mutual waiver of subrogation |
| Early termination | Whether the tenant can terminate early under specified conditions | How the termination fee is calculated; termination can be tied to conditions such as visa refusal or inability to obtain licenses |
| Default and remedies | What constitutes default, grace periods, the landlord’s remedies (acceleration of rent, attorney’s fees, etc.) | Seek written notice and a cure period; watch for rent acceleration clauses and waivers of the duty to mitigate |
Our firm does not provide lease templates. A landlord’s form lease usually favors the landlord, most provisions are negotiable, and it should be reviewed by an attorney before you sign.
Personal guarantees: the risk investors most often underestimate
One purpose of forming an LLC or corporation is to limit business debts to the company level. But a new company has no operating history, so landlords almost always require the investor’s personal guarantee. Once you sign an unlimited guarantee, even if the company closes, you may personally remain liable for all rent and charges for the rest of the term.
- Try to negotiate a capped guarantee, for example limited to a certain number of months’ rent;
- Provide that the guarantee steps down or is released after rent has been paid on time for a set period;
- Offer a larger security deposit or a letter of credit in place of a personal guarantee;
- If both spouses are asked to sign the guarantee, understand that this may reach jointly owned family assets.
From an E-2 perspective, a personal guarantee increases the risk the investor bears, but the guarantee itself is not “invested funds” and cannot be counted toward the investment amount.
How it connects to E-2
The lease is evidence of “actual investment”
Under the U.S. Department of State’s Foreign Affairs Manual, 9 FAM 402.9-6(B), investment means placing funds at risk, and the commitment must be real and irrevocable; merely keeping money in a bank account, or having only an intent to invest in the future without a present commitment, is not enough. The applicant should also be close to actually starting business; having signed a few contracts and looked at a few locations is not enough. A signed lease, together with the security deposit, rent, build-out construction costs and equipment purchases already paid, directly shows that funds have been invested in the enterprise.
How much rent counts toward the investment
9 FAM 402.9-6(B) provides that rent may count toward the investment, but only the amount used for the project in any one month; a full year’s rent generally does not count unless it has been prepaid. Leased equipment likewise counts only at the rent actually paid, not at the equipment’s market value. Therefore, do not present the total value of the lease as your investment amount. What actually counts toward the investment is mainly the amounts already paid and the build-out, equipment, inventory and other investments made on the basis of the lease.
Expenditures before signing and before the visa
For a newly created enterprise, the Department of State measures whether the investment is substantial against “the amount needed to establish the enterprise,” and assets already purchased and estimates of assets still to be purchased can be considered together. Rent, build-out and equipment payments the investor has made before the visa can be part of the investment, but there must be proof of payment showing that the funds came from the investor personally, can be traced to a lawful source, and were actually used in the enterprise’s operations. A TI allowance paid by the landlord is not the investor’s own funds and usually cannot be counted as the investor’s investment.
Contingent on visa approval: conditional leases and escrow
9 FAM 402.9-6(B) allows an investment to be conditioned on issuance of the visa: as long as the assets to be invested have been placed in escrow, with release or transfer agreed upon once the condition is met, the “irrevocably committed” requirement may be satisfied. Practical approaches include:
- the lease provides that if the E-2 visa is refused, the tenant may terminate the lease and the escrowed security deposit and prepaid rent will be returned;
- the security deposit, prepaid rent or build-out funds are deposited in a third-party escrow account and automatically released to the landlord or contractor after the visa is issued;
- the escrow agreement clearly states the conditions and timing for release and refund, with the visa outcome as the only condition for a refund.
Note: if the lease or escrow agreement allows you to terminate at will and receive an unconditional refund for reasons other than the visa, the funds may be considered not at risk. The conditional terms should be designed together with your attorney, and the landlord must agree to them in advance.
Matching the lease term to the visa period
The validity of an E-2 visa is set by the reciprocity arrangement for the applicant’s nationality, the period of stay authorized at each admission is determined separately, and the visa can be renewed as long as the enterprise continues to operate. A lease term that is too short may lead the consular officer to doubt the enterprise’s continuity; a term that is too long with no exit arrangement carries great risk if the visa does not go smoothly. A more common approach is a moderate initial term plus renewal options, combined with visa-contingency terms and reasonable assignment provisions.
The premises should match the business plan
The lease’s use clause, square footage, location and build-out plan should be consistent with the business, customer traffic, headcount and financial projections in the business plan. Leasing a small office while planning a large restaurant, or a use clause that does not permit the planned business, will undermine the credibility of the application.
Pre-signing checklist
Common misconceptions
- “The total value of the lease is my investment amount.” Under Department of State guidance, rent generally counts only for one month’s amount, unless prepaid.
- “The previous tenant ran the same kind of business, so zoning is surely fine.” The City of Chicago expressly warns not to assume that a prior occupant’s zoning determination applies to you.
- “Signing the lease in my own name is more convenient.” Signing in your own name mixes personal and business assets and makes it harder to prove that the investment went into the E-2 enterprise.
- “The broader the contingency clause, the safer.” An arrangement that lets you walk away at any time for no reason may cause the funds to be considered not at risk.
- “The landlord’s contract is standard and can’t be changed.” Most commercial leases are negotiable, especially the guarantee, repair, assignment and termination provisions.
How we can help
- Reviewing and negotiating Illinois commercial leases, focusing on guarantee, cost, use, assignment and termination provisions;
- Designing lease terms and escrow arrangements contingent on E-2 visa approval;
- Organizing the lease, proof of payment and company documents into E-2 investment evidence, coordinated with the business plan and source-of-funds materials;
- Working with local counsel to review leases for premises outside Illinois.
Our firm does not match clients with storefronts or businesses, and we do not guarantee visa outcomes.
Frequently asked questions
Do I need to sign a lease before I have the E-2 visa?
Usually, yes. The Department of State requires the investor to have already entered into agreements, committed funds and be close to actually starting business; merely preparing to invest is not enough. To reduce risk, the lease can provide a termination right if the visa is refused, and the security deposit and prepaid rent can be held in an escrow account.
Does the security deposit count as investment?
Whether and how much of a security deposit counts depends on whether it is truly at risk and on the specific arrangements. What is certain is that amounts actually paid and used in the enterprise’s operations are more persuasive than amounts that can be refunded unconditionally. How to calculate it specifically should be worked through item by item with your attorney before you apply.
The landlord wants my personal guarantee. Can I refuse?
You can negotiate, but it is uncommon for a new company to provide no guarantee at all. Common compromises are a capped guarantee, a guarantee that decreases year by year, or a larger security deposit or letter of credit instead. Before signing, understand the scope and duration of the guarantee.
Do I need to lease commercial space for an online business or consulting company?
The law does not require an E-2 enterprise to lease a physical storefront, but the enterprise must be a real, operating business and non-marginal. The space should fit the nature of the business and the business plan; whether coworking space or a small office is enough depends on the specific business.
Can the lease be signed in Chinese?
U.S. landlords’ leases are generally in English. You can have it translated to understand it, but the English original should control; when filing a visa application, non-English documents must be accompanied by English translations.
If I buy an existing business, what happens to the existing lease?
You need to review whether the existing lease can be assigned, whether the landlord’s consent is required, how much of the term remains, and whether a change in ownership counts as an assignment. The purchase agreement should be arranged in step with the lease assignment or a new lease; otherwise you may buy the business but lose the premises.
Official sources
- U.S. Department of State: 9 FAM 402.9 Treaty Traders and Treaty Investors (E visas)
- 765 ILCS 705/1 (landlord exculpatory clauses in leases)
- 735 ILCS 5/9-209 (demand for rent)
- Illinois Landlord and Tenant Act (765 ILCS 705)
- City of Chicago BACP: zoning review for business licenses
Related reading
- E-2 investor visa overview
- How to write an E-2 business plan
- Forming an LLC in Illinois
- EIN, bank accounts and tax registration
- Company formation & E-2 section home
Preparing to sign a commercial lease for your E-2 enterprise? We recommend having an attorney review the terms before you sign and designing the visa contingency and escrow arrangements together. Book an attorney consultation, or call (312) 519-1115.
This page is general information, not legal or tax advice. Company formation and commercial leases are governed by state law and the rules differ by state; government fees and forms are as currently published by the Secretary of State, the IRS and other official sources; visa outcomes are decided by the U.S. Department of State and immigration agencies and depend on the specific facts. Our firm advises on Illinois, New York and Massachusetts law.