With great property comes great responsibility. Commercial lease agreements spell out the responsibilities of both the tenant and landlord. Whether your lease agreement is one page or thirteen, you’ll want to understand the terms before you sign.
While there’s no standard commercial lease agreement, most commercial leases address similar items. Read more about what you should look for on a lease agreement.
What’s On Your Lease: The Basics
It may sound obvious, but a lease should include the names of both parties involved: the tenant and the landlord. When renting real estate for your business, you’ll want to list your business as the tenant, not you as an individual. However, the landlord is likely to ask for a credit worthy entity, company or individual to personally guarantee the amount of the lease. An address, along with details about the property and its current state, should also appear on the lease.
Once you receive an agreement, you’ll need to examine the terms.
- Rent amount. We all know what rent is. It’s the amount you pay for occupying a space. Landlords determine rent based on the property’s square footage. Make sure you know how much rent you can afford before making a commitment.
- Late fees. If you don’t pay your rent on time, what’s the consequence? Your lease agreement will outline the penalty for not paying your rent by the set due date.
- Deposits. Before your business can move in, you’ll have to pay a security deposit. Your lease will outline when you get this deposit back after your tenancy ends. The landlord will deduct any damages to the property or missed rent payments from this deposit.
- Length of tenancy. Your lease should state the length of the agreement. It should give you the exact dates for when your term starts and when your term ends. Many landlords like long-term leases, but, if your business is just starting out, you may not want to commit to a long lease agreement. New businesses may want to negotiate for a short-term lease with the option to extend. The landlord may not agree to the same rent amount for the option if they accept your shorter term lease, as they will want the option to increase the rent if the market will allow and your business is successful. If you aren’t willing to risk something, many times the landlord isn’t interested either. Someone has to believe that the business will succeed, or they shouldn’t sign a lease. The landlord is giving you the exclusive use to his property for the terms agreed to, and he wants to be sure he will be compensated.
- Utilities and maintenance. How are utilities calculated? Who pays for what? Who is responsible for maintenance and repair? Be sure to read your lease agreement carefully for these details. Depending on the age and state of the property, maintenance and repair could be quite costly. The landlord will guarantee that all plumbing, HVAC and electrical equipment is in working condition when occupied.
Responsibilities & Restrictions
While the landlord normally prepares the lease, you can take an active role in its creation by negotiating for items not outlined on the lease, such as an exclusivity clause or the ability to sublet the space, for example.
Many times, before the official lease is drafted, a simple letter of intent is negotiated between the parties outlining the basic terms of the lease. The landlord will want to use his lease as it has been prepared by his legal counsel. If they own multiple properties, it has probably been reviewed by dozens of lawyers who have both represented the landlord as well as tenants. Good leases should be fair to both parties, and it is recommended that the tenant has the final lease reviewed by their legal counsel as well.
Commercial lease agreements offer tenants fewer legal protections than residential agreements, but they are often more flexible. If you have specific needs for your space, you’ll likely be able to discuss modifications or additional features with the landlord. Together, you’ll decide who will pay for improvements and if your business has to restore the space to its original state when the lease expires.
Aside from the usual items, like rent amount and term, commercial lease agreements dive into other clauses related to what a business can and cannot do within the space.
- Signage. Zoning regulations can stop you from putting up signs and so can your lease. If visible signage is crucial for your business, make sure that the agreement doesn’t limit where you can place your signs. Landlords will abide by local sign ordinances, so do your research on local ordinances.
- Use clauses. These clauses define what you can’t do on the property. Most of the time, use clauses are added to protect the space from damage. Some use clauses may prevent you from expanding your business into certain industries.
- Exclusivity clause. Let’s say you own a children’s clothing store. Do you want to be the only one in your shopping complex? An exclusivity clause prevents the landlord from renting a space within the building or center to one of your competitors. When a landlord rents to two competitors, what normally happens is that both businesses suffer and go out of business; thus, the landlord loses both tenants.
- Subletting. Even if you stop using the space, you’ll still have to pay rent until your agreement expires. If your business fails or moves to a new location, an assignment or sublet clause lets you give the space (and the lease) to another business. This way, someone can use the space and cover the cost. The landlord may ask to see your new tenant’s financial information to know if they are capable of paying the rent going forward. The landlord may or may not release you from further rent payments. If the subtenant is not financially able, make sure you understand whether the landlord has released you from your lease or whether you are having to guarantee rent payments until the end of the term. Everyone needs to clearly understand their responsibilities.
- Holdover clause. Want to stay past your lease? Holdover clauses outline your right to remain in a space after your lease expires. Some clauses state that if a tenant doesn’t vacate, the lease transforms into month-to-month at an increased rental rate. These increased rates may be as much as 150% of the current lease amount. Other clauses may state that you cannot holdover at all. Read this clause carefully so you don’t run the risk of trespassing.
Knowing more about commercial lease agreements can help you confidently negotiate your terms. Are you looking for a commercial building for lease?
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