Commercial property leases are typically more complex than residential leases. A commercial lease is often lengthy with a significant number of legal terms, clauses, and other considerations. If you are a business owner looking to lease property, consult with a business law attorney to navigate the legal complexities of a potential commercial lease.
Commercial Leases From a Legal Angle
Commercial leases are legally binding agreements. Dissect a proposed commercial lease with the guidance of a business law attorney and you’ll find it is laden with complex legalese. The lease terms require in-depth analysis prior to signature.
The lease’s length, amount of rent, personal guarantees, security deposit amount, and additional conditions are to be carefully scrutinized. If your business attorney highlights any of the terms as questionable or unfair, negotiate them to your benefit before signing.
Type of Lease
Common types include gross leases, net leases, and modified gross leases, each with different implications for cost distribution between the tenant and landlord. For instance, in a triple net lease, the tenant is responsible for property taxes, insurance, and maintenance costs in addition to rent, which can significantly affect your budget.
Property Care
Nearly all commercial leases include provisions for property repair and maintenance and identify the party responsible for such. The lease will explain the landlord’s responsibilities in terms of maintenance and repairs. If the tenant is to perform any such maintenance/repairs, they should also be detailed in the agreement. The lease should also explicitly state the specific party that is to pay for all maintenance and repairs and any limits thereto.
How Will the Property Be Used?
Every commercial lease should include information about the property’s use during the rental period. Specific provisions for the space’s use are to be detailed. Additionally, negotiating exclusivity clauses to prevent a similar-themed business from operating within the same building/shopping center should be negotiated. If the lease does not outline the property’s intended use including restrictions, lean on your business law attorney to amend it as necessary. Landlord and tenant rights in the context of making alterations to the property are also to be noted.
Lease Length is Often a Point of Contention
Business owners and the owners of commercial properties often struggle to agree on the duration of a lease. In general, commercial leases typically range from 2 to 10 years. However, there is the potential for business leases to be a single year or beyond five years. Most business owners want a lease term in the range of three to five years, with one or more renewal options. Business owners who anticipate an increase in commercial property values are encouraged to sign a longer lease to lock in a lower rate in today’s dollars. The landlord might insist on the addition of rent escalators that hike the cost of monthly rent in accordance with local commercial property rental values.
Mind the Details of Insurance and Subleasing
Most commercial lease agreements include information about subleasing and insurance coverage. If the proposed agreement does not address subleasing, add that information. The details about subleasing the space to other parties including specific restrictions and conditions must be met prior to subleasing. Some leases include a clause requiring the landlord’s approval for such changes, which can restrict your options.
The agreement should also include the different types of insurance coverage for the property. As an example, general liability insurance is often included in commercial lease property terms.
The terms of the lease also detail how tenants and landlords are to be held responsible for securing the required insurance policies. Moreover, payment for the insurance coverage must also be noted.
Improvements and Modifications
Often, a space needs to be modified or renovated to suit business needs. Understand who is responsible for the costs of these improvements and whether you are required to restore the property to its original condition at the end of the lease. Negotiating an allowance for improvements can be beneficial.
Terminating the Lease
A commercial lease is incomplete without provisions governing the potential termination of the agreement. The failure to list lease termination provisions puts one or possibly even both parties at a disadvantage in the event of a legal battle. The specific obligations and rights of both the lessee tenant and lessor landlord/property owner are to be detailed in the event of the lease’s termination. Penalties for early termination can be severe, so it’s vital to negotiate terms that do not unduly burden your business should circumstances change.
Legal Guidance is a Call Away
The business law attorney of Capstone Legal Strategies helps business owners reach fair property lease terms. If you are considering leasing a commercial property, give us a call before writing and signing the proposed agreement.