Most businesses will encounter a commercial lease agreement at one point or another, whether as the landlord or a tenant. And understanding what terms should be included and the implications of each are of critical importance to ensure smooth relations between the landlord and tenant moving forward. This week we will explain some provisions that should be included and some thoughts to consider about each.
In most commercial situations a lease agreement will be signed by two business entities and the parties should make sure they are signing on behalf of their business entity and not accidentally on his or her on behalf as an individual. Some leases will also contain a personal guarantee. If you are the tenant, you might consider asking for limitations on the personal guarantee such as dollar limits or time limitations.
While many residential leases are for one year, commercial lease agreements can be for much longer terms including 5, 10, or even 30 years. When negotiating your commercial lease be sure to consider not only the length of the initial term but also the renewal rights. Sometimes the lease will grant renewal rights to the tenant while other times the lease will require the mutual consent of both the landlord and tenant before it can be renewed. And don’t forget to consider what will happen to the rental payments during each renewal term!
In addition to negotiating the price of the rent, both parties need to carefully examine other expenses related to the property and clarify in the lease agreement who must pay for certain property expenses. Some items for consideration include maintenance fees, upkeep of common areas (usually called Common Area Maintenance or CAM), utilities, insurance, and taxes. Since many of these expenses are passed on to the tenant, it is important that both parties understand how they are calculated and divided among other tenants, if any.
Further, your lease might be called a “Triple Net Lease.” If this is the case then it likely contains provisions that pass almost all obligations on to the tenant making the tenant responsible for taxes, insurance, and maintenance/repairs, in addition to the rent payments.
Tenants should also request provisions to protect the tenant’s business operations including exclusivity and co-tenant provisions. An exclusivity provision can restrict the landlord’s ability to lease other portions of the property (or even other properties within a certain mile radius) to similar businesses. For example, if you operate a coffee shop, the exclusivity clause would prohibit the landlord from leasing another property owned or controlled by the landlord to another coffee shop if the other property is within 10 miles of your coffee shop. Another provision is a co-tenant provision that allows you to terminate your lease if the anchor tenant of your shopping complex vacates and the landlord fails to lease that space to a suitable replacement anchor tenant.
As you can tell from the above points, commercial lease agreements are often more complex and more negotiated than residential lease agreements. For this reason, it is always a good idea to have an attorney on your side, regardless if you are the landlord or the tenant.
*This article is very general in nature and does not constitute legal advice. Readers with legal questions should consult with an attorney prior to making any legal decisions.
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