Understanding Commercial Leases

A commercial property lease is a contract that gives a tenant the right to use a space for a period of time – how long the lease is for can vary from as short as 3 months (or even three days) to as long as 20 years. However, these leases are never simple and never short; these long and complex documents can contain a wide range of terms that should be negotiated between the landlord and the tenant.

The commercial lease is a way for both the landlord and the tenant to have some comfort with the transaction – the landlord knows how much money to expect from the tenant and the tenant knows how much they’ll have to pay the landlord. Each party should also know what they are responsible for in terms of maintenance, taxes, and other issues.

Some of the critical provisions found in every lease include:

The parties must be clearly defined, whether it is an individual, partnership, or entity.

The description of the property being leased must be clear, and should include both usable and rentable square footage.

The lease amount is determined by taking into account the balance between controlling the cost for the tenant, and ensuring a steady income from the landlord’s perspective. Additionally, the term must be stipulated to include renewal options when applicable.

Issues such as who will pay for the maintenance of the building’s lobby, parking lot and sidewalk, as well as who will pay for insurance and taxes on the building, need to be determined. Some leases reference CAM or common area maintenance, which is an additional monthly payment to cover these costs.

Use of the Leased Property
It should be set out at the onset of the conduct a tenant may engage in at the premises. Tenants mostly desire broad clauses that give them maximum flexibility for participating in their operations. However, many landlords have agreements in place limiting how many competing businesses they can rent to (or may want to limit it on their own). Furthermore, many landlords will look for clauses that protect them in case the tenant uses the property in a way that is not permitted.

Condition of Premises
Landlords will generally want to transfer the property to the Tenant quickly and with as little work done as possible – both because they don’t want to incur the cost and because they want the Tenant in and paying rent as soon as possible. Tenants, on the other hand, will want to make sure that the space is built out and ready before they move in. Generally, there is some compromise available.

Assignment and Subletting
Many Landlords will not permit assignment and some also limit or prohibit subleases. When a landlord does allow it, they should ask for the right to refuse the sublease or assignment and the right to make the sublessee sign guarantees or leases. However, as a tenant, you want this right to be as broad as possible.

Other clauses that may be included deal with: insurance, damage, and destruction, maintenance, remedies upon default, surrender, and holdover. All these clauses address many aspects of the leased property.