Commercial leases come in various forms, including gross leases, net leases, and percentage leases.
- Gross Lease: The landlord covers most expenses, and the tenant pays a fixed rent.
- Net Lease: The tenant pays rent plus some operating expenses, such as utilities, maintenance, or property taxes.
- Percentage Lease: Rent is based on a percentage of your sales, typically in retail spaces.
Understanding the type of lease you’re signing ensures you’re aware of your financial responsibilities.
Many terms in a commercial lease are negotiable, and tenants should advocate for their best interests. Key areas to address include:
- Rent Increases: Ensure any escalation clauses are reasonable and predictable.
- Lease Duration: Balance flexibility with stability by negotiating renewal options and termination rights.
- Use Clause: Define your permitted use of the space to prevent restrictions on business activities.
- Subleasing Rights: Negotiate the ability to sublease in case your business needs change.
- Early Termination Clause: Negotiate an early termination clause that would govern what penalties you would face to terminate the lease agreement early. This will protect you for the unexpected things happen in business.
- Gross Earnings Reporting: Eliminate the need to report your gross earnings to the landlord during the term of the lease.
Commercial leases often include additional expenses like common area maintenance (CAM) fees, property taxes, and insurance. Request a breakdown of these costs and ensure they are clearly outlined in the lease. Consider negotiating caps on variable expenses to avoid unexpected increases.
Clarify who is responsible for repairs and maintenance, particularly for structural issues, HVAC systems, and large-scale renovations. Avoid leases that impose disproportionate burdens on tenants for major repairs. Request a cap on HVAC repairs or replacements to protect yourself from unknown/expensive costs in the future.
Leases should address scenarios like property redevelopment or a landlord’s decision to sell. Negotiate for elimination of relocation provisions or compensation in the event of early termination by the landlord.
If you need to make modifications to the space, negotiate a tenant improvement allowance (TIA) where the landlord contributes to the cost. Ensure the lease specifies the scope of permissible improvements and who retains ownership of them upon lease termination.
A commercial lease is a legally binding document, and overlooking unfavorable clauses can lead to financial or operational challenges. Working with experienced attorneys such as The Walter Law Group ensures the lease aligns with your business needs and protects your interests.
