Commercial real estate leases are far more complex than residential leases. There are many more issues and situations to consider that will have a far-reaching effect on both the landlord and the tenant over the course of the lease. When reviewing a commercial lease, remember that you may be able to take advantage of your bargaining power to negotiate changes and certain terms may not be set in stone.
Understand Your Entire Financial Commitment
Rent payments can be one part of your financial obligation when you are signing a commercial lease contract. Commercial real estate leases may assign the day-to-day costs of the property to different parties. For example, depending on the type of lease that you sign, you may be responsible for things like utilities and taxes. The lease should clearly set out who is responsible for what and in clear terms.
Usually, who pays for what is determined by the type of lease that you sign. Most commercial leases are net leases, but there are different kinds of net leases. Most commercial lease tenants will pay some or all of the expenses relating to the building, which could include taxes, maintenance, and utilities.
Similarly, the commercial lease contract may require the tenant to contribute part or all of the capital costs for major improvements and repairs to the property. For example, if the premises needs a new HVAC system, the landlord may expect the tenant to pay the costs. If the tenant is responsible for major costs, the rent for the premises should be adjusted accordingly.
Whether and How a Commercial Lease Can Be Terminated
Commercial leases are binding contracts. You must continue to pay the rent so long as the lease is in effect. When you sign a long-term lease, circumstances may change over time. The location may no longer suit you, or your business may have outgrown the space. A lease may have an early termination clause that allows the tenant to end the lease early with notice to the landlord. These early termination clauses usually have some sort of penalty or financial consideration for the landlord attached to them. If there is no early termination clause, the tenant would have to negotiate a buyout of the lease with the landlord, with the landlord under no obligation to agree to anything.
Some leases will allow you to transfer the lease or sublet the space with written notice to the landlord (and sometimes, with their permission). If this is something you think you may need in the future, make sure it is clearly addressed in the contract.
Use Clauses
Commercial real estate leases will usually prescribe the use of the property. Tenants may be limited in the types of activities they can engage in on the premises. Other types of activities may require special permission from the landlord—if they are willing to give it.
In addition, some leases may allow for the tenant to have exclusive use in a larger area. For example, if the commercial real estate lease is for a retail establishment, there may be a clause in the lease that promises the tenant will be the only business of its type in a given area rented by the landlord.
Maintenance
Commercial leases may vary in terms of who is responsible for what types of maintenance. Usually, the landlord can be responsible for some repairs, including HVAC service. However, landlords may often try to subtly shift responsibility for some types of maintenance onto the tenants. For example, some leases only obligate the landlord to make repairs that impact solely the area(s) leased to the tenant.
Even if the tenant has to perform some maintenance, it does not necessarily mean that it is a bad lease agreement. However, responsibility for maintenance should be reflected in the agreement, and perhaps the rent charges set forth in it. Regardless, tenants should go into the lease knowing exactly who is responsible for what types of repairs so there are no surprises. Many leases are detailed in terms of the exact division of maintenance responsibility. If the lease is vague on this point, you can negotiate terms to get more specificity.
Restrictive Conditions and Covenants
When you rent a space, you obviously have a certain use in mind. Even if the landlord does not object to that type of use, the lease itself may have restrictions that can make the usage impossible. For example, the lease could have noise restrictions that keep you from using it for certain activities. Other leases could have clauses about appearance that would prevent your desired usage.
Make sure you understand what your lease restricts before you sign it. You may have the right to negotiate restrictive covenants that would allow you to use the premises for your desired purpose. If not, this may not be the right lease for you.
Tenant Improvements
Tenants may need to make their own improvements to transform the space into one that is more suitable for their business. Leases may differ on whether and how the tenant is allowed to alter the space. Without the ability to tailor the space to your own needs, you may not be getting what you want. Here, you should consider the following things:
- Whether the landlord will permit any tenant improvements
- The process for getting tenant improvements approved by the landlord
- Who bears the costs of any tenant improvements
- Whether the tenant needs to restore the initial condition of the property at the conclusion of the lease
Dispute Resolution
While it is not inevitable that there will be disputes between the landlord and tenant, they may arise from time to time.
Some leases may have their own dispute resolution mechanism by which the landlord and tenant can work out issues. However, other leases may seek to impose limitations on the tenant’s right to seek relief if there is a dispute with the landlord. For example, the tenant could be compelled to seek binding arbitration in a forum that is friendlier to the landlord instead of being able to take the case to court.
Commercial real estate leases are not the same as residential leases. Both the landlord and the tenant have the ability to negotiate the terms in a commercial real estate deal. Before the tenant signs the agreement, it should take a close look at all the terms to see if they fit the situation and what needs to be changed. Oftentimes, the lease that a commercial real estate landlord hands you is just the starting point for negotiations. Tenants should have a commercial real estate attorney review the proposed lease and suggest necessary changes. That attorney could then handle the negotiation of these updates and help finalize the document.
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