What is a commercial lease?
A commercial lease is a legally binding contract between a landlord and a business tenant. The lease gives a tenant the right to use the specified property for a commercial activity for a defined period of time in exchange for an agreed upon amount of money paid to the landlord. The lease outlines the rights and responsibilities of both the landlord and tenant during the lease term.
What is the governing law of my lease?
The governing law is the jurisdiction where the property is located, it is not the jurisdiction where the landlord and tenant reside.
What are the common elements in a commercial lease?
A commercial lease typically deals with the following:
- the type of property being rented
- the address of the property being rented
- the term of the tenancy and whether the tenancy is for a fixed term
- the amount of rent payable, how often and when the rent should be paid
- the type of business that may be conducted on the premises
- the provisions of any security/damage deposit
- lease renewal terms
- landlord improvements and signing incentives
- whether the tenant can assign or sublet the property
- notice requirements for termination of the tenancy
- insurance requirements
Types of Leases and Common Clauses
It’s always best to have your lawyer (one specializing in commercial leasing) review your agreement. Here are the various terms and details you will need to understand, if you choose to go it alone.
Incidental Expenses
Your costs on top of base rent. These can include property tax, insurance, utilities, maintenance, common area costs and repairs.
Common Area Maintenance
If there is a common area, all tenants typically share common area costs. Examples include fees for snow removal, janitorial services, landscaping, grass cutting and property management.
Gross Rent Lease
A commercial real estate lease where you pay a single amount to the landlord that covers base rent and all incidental expenses.
Modified Gross Lease
A commercial lease where you and the landlord share certain incidental expenses.
Net Lease
A commercial lease where you typically pay for one incidental expense directly. In a single net lease, you usually pay the base rent plus property taxes. The landlord pays all other expenses.
Double Net Lease (NN)
A commercial lease where you usually pay the base rent plus two incidentals—for example, property taxes and insurance. The landlord covers all other expenses.
Triple Net Lease (NNN)
A commercial lease where you pay the base rent, plus property taxes, building insurance and utilities, as well as other operating and maintenance costs. The landlord pays for nothing except for structural repairs.
Percentage Rent Lease
A commercial lease where you are required to pay a base rent plus a percentage of gross sales over a certain minimum. These are usually used in malls and retail locations.
Tenant Improvements
Renovations to a leased commercial space to make it suitable for your business requirements. Unless you specifically state that you retain ownership of improvements you make. An example would be machinery, built-in shelving, special or decorative windows. You should speak to a lawyer if you want to be able to own and take these elements with you when you leave.
Who are the parties to the lease?
The parties to a lease are the lessor, also called the landlord and the lessee, also called the tenant. The lessor owns the property and allows the lessee to use the property in exchange for rental payments.
Frequently Asked Questions About Commercial Leases
What are fixtures?
In real estate terminology “fixture” refers to a piece of property that is attached to the rental unit so that removing it would damage the property. Examples of fixtures may include built in cabinets, sinks, toilets or wall-to-wall carpeting.
What are chattels?
Chattels are personal property. They can be moved from one location to another. Examples of chattels are blinds or curtains, microwaves, refrigerators, desks and personal computers.
How is the tenant allowed to use the premises?
The tenant can use the leased property for purposes that have been approved by the Landlord. The “permitted use of premises” clause limits the tenant to the agreed upon uses.
What does “Automatic Renewal” mean?
Automatic renewal means the lease continues indefinitely on the agreed upon period (weekly, monthly, or yearly) until either the tenant or the landlord gives notice to the other party that they will be terminating the lease.
What is a fixed end date?
A lease with a fixed end date gives certainty of term for both the landlord and the tenant. It specifies the exact day the tenancy will end. In a fixed end date lease, the landlord cannot increase the rent, or change any other terms of the lease unless he specifically reserves the right in the lease, and the tenant agrees to the changes.
What is a security deposit?
A security deposit is money the tenant pays to the landlord at the start of the lease period, to guarantee that the tenant will fulfill all obligations under the lease. The landlord holds the security deposit for the term of the lease to ensure that the tenant does not default on the terms or damage the property. If the tenant does damage the property (not including normal wear and tear) or if the Tenant defaulted on rent, the landlord is entitled to take that money from the security deposit. At the end of the lease term, the tenant will receive the deposit back minus any deductions for repairs/restoration.
What is an inspection report?
The inspection report is completed by the tenant within a reasonable amount of time after the tenant begins to occupy the space. The tenant notes the condition of the space at the time of possession. This is used at the end of the lease to determine if the tenant caused any new damage to the unit.
The pandemic added some complexity to leasing issues – as businesses that were closed couldn’t sustain their lease payments. Whether you are looking at a fairly standard lease agreement or something that does have complexities, you have options in how you get the help you need.
CEO Law offers a set price for a Commercial Lease Review. This allows for cost control and assurance that the Lease has no issues or concerns for you. Need a Commercial Lease drafted? Let us know, we can quote you on that.
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