Below is a list of five terms you should expect to see in a standard commercial lease.
Before entering into any negotiations with a commercial landlord, it’s important to have professional representation. Professional representation provides you the good working knowledge of commercial leases that should also help you negotiate a better contract and avoid legal issues down the roaad.
1. Rent Clause
For almost any business, but especially smaller businesses, the amount of rent expected monthly is one of the most important issues when it comes to a commercial lease. While rent may seem fairly straightforward, there is a good deal of negotiating room available, even if the rent itself is already established. For example, in your rent clause you may want to negotiate:
- Automatic rent increases: what they’re based on, when they are in effect and how much the increase should realistically be.
- Tenant improvement deductions: whereby the landlord agrees that approved improvements to the building will result in rental decreases.
- How much of the landlord’s operating costs will be passed on to you.
- Establishing a method for dealing with unanticipated rent issues and increases.
2. Rental Rate
This is the dollar amount that Tenant agrees to pay for possession and use of the premises. The rental rate is typically calculated on a per square foot basis by month or year and is typically quoted as a gross amount or as an amount net of operating expenses such as common area maintenance (CAM), taxes and insurance. For example, rent may be quoted at $20 per square foot triple net (NNN) per year with operating expenses totaling another $10 per square foot per year. Rent could also be quoted at $30 per square foot gross per year with no additional charges for operating expenses.
3. Description of the Premises Clause
The description of the premises clause is crucially important, so make sure that it accurately describes what you intend to rent. If you are renting an entire building, then this may be fairly straightforward and could simply be the building’s address. However, if you are renting just a portion of the space, you should make sure that the lease describes that space in sufficient detail.
It may also be helpful to address “access” issues in this clause, to ensure that you, your employees and your customers have easy access to your rented property. Other items you may want to consider mentioning in the description include shared areas, such as conference rooms, storage rooms, and parking.
4. Parties Clause
The listing of the parties to the agreement is a fairly straightforward clause, but the key thing to watch out for is the use of correct business names. One of the primary reasons for using businesses, and not doing business in a person’s name is to shield individuals from liability. Make sure that your business name, not your actual name, is on the lease.
5. Term Clause
The term clause can seem fairly straightforward as well, but requires more of your attention than you might think. Many lease terms begin when they are signed, and in your case, that may be well before your business is actually up and running. Even if a landlord agrees that no rent is due until you move in, other terms of the lease may become effective immediately, such as the need to carry insurance. The requirements of these terms can be expensive, especially for a new business. The best approach is to write in several start dates for different obligations under the lease – such as when to move in, when rent is first due, when you need to have insurance, etc.
Stay tuned for five more lease terms next week.