Leasing a commercial property is a significant commitment for any business. However, commercial lease agreements can be lengthy and filled with complex legal jargon that may be challenging to understand. Without a thorough understanding of the lease terms, business tenants can find themselves facing unexpected costs, restrictive clauses, or even legal disputes. In this post, we’ll break down the key components of a commercial lease and what every business tenant should know before signing.
1. Types of Commercial Leases:
Commercial leases come in various types, each with different payment structures and responsibilities. The most common types are gross leases, net leases, and percentage leases. A gross lease typically includes all costs (rent, utilities, maintenance) in a single payment, while a net lease requires the tenant to pay additional expenses like property taxes, insurance, and maintenance. A percentage lease involves paying a base rent plus a percentage of the business’s revenue.
- Understanding: Knowing which type of lease you are entering into is crucial to budgeting correctly and avoiding unexpected costs. Always clarify what is included in the rent and what additional expenses you may be responsible for.
2. Rent and Additional Costs:
Rent is the most obvious cost in a commercial lease, but it’s essential to understand any additional expenses that may be included. These can include common area maintenance (CAM) fees, property taxes, insurance, and utility costs. Tenants should be aware of how these costs are calculated and whether they are fixed or subject to change.
- Understanding: Review the lease carefully to understand how rent and additional costs are structured. Ask for a breakdown of all expenses and consider negotiating caps on variable costs to avoid significant increases in your lease expenses over time.
3. Lease Term and Renewal Options:
The length of the lease term and the options for renewal are critical components of a commercial lease. A long-term lease can provide stability, but it can also lock you into terms that may not be favorable as your business grows or market conditions change. Renewal options should be clearly defined, including notice periods and any changes in rent for the renewal term.
- Understanding: Consider both the length of the initial term and the renewal options available. Ensure there is flexibility in the lease to accommodate potential growth or changes in your business needs.
4. Maintenance and Repairs:
Commercial leases should clearly outline the responsibilities for maintenance and repairs of the property. Typically, landlords handle structural repairs, while tenants are responsible for interior maintenance. However, this can vary, and some leases place a significant maintenance burden on tenants.
- Understanding: Carefully review the lease to understand who is responsible for maintaining and repairing different parts of the property, such as HVAC systems, plumbing, or electrical work. Make sure the lease terms align with your expectations and negotiate if necessary.
5. Subleasing and Assignment:
Subleasing or assigning the lease to another party can provide flexibility if you need to downsize or relocate your business. However, many leases have strict restrictions on subleasing or assignment, often requiring landlord approval.
- Understanding: Review the lease terms related to subleasing and assignment. Ensure you have the right to sublease or assign the lease if your business needs change. If this flexibility is not included, negotiate to add a clause that allows it with reasonable conditions.
6. Exit Strategies and Early Termination:
Businesses evolve, and your space needs may change. Understanding the terms of early termination or exit strategies is essential. Some leases have hefty penalties for breaking the lease early, while others may offer more flexibility.
- Understanding: Before signing, discuss and understand any exit strategies available to you. Look for clauses that allow for early termination under specific conditions and the costs associated with it. Negotiate favorable terms to ensure you have options if you need to leave before the lease term ends.
Conclusion:
A thorough understanding of your commercial lease agreement is essential to avoid unexpected costs and legal disputes. Taking the time to carefully review and negotiate lease terms can save you from future headaches and financial strain. If you’re negotiating a commercial lease or need a lease reviewed, the experienced real estate attorneys at Jagvino firm are here to help.
