With commercial rent on a downturn and plenty of leasing space available, understanding the basics of a commercial lease can be essential to keeping commercial property afloat. The flexibility inherent in a commercial lease agreement allows for the ability for all sides to receive what they want through negotiation; however, that flexibility comes with more risk to those unprepared for every eventuality or without proper representation. Avoiding common pitfalls and preventing future disputes can provide a landlord with a safety net all-too necessary in today’s tough economic times.
What the Lease Must Include
While the immediate focus of every commercial lease turns to rent – as it should – there are several overlooked aspects to negotiating commercial rent. For example, most commercial rent is based on location and square footage. However, placing the burden of upkeep and utilities onto the commercial renter can ultimately save time and money for the landlord, even if that means a lower monthly rent. In addition, accounting for other costs such as building maintenance and operating expenses can ultimately lower costs to the landlord.
Other items to consider include rent increases, which usually go up by a named percentage per year, the amount of the security deposit and accompanying requirements, and the start date of the rent and the dates when rent is due.
Generally, the more time the tenant agrees to in the lease agreement, the greater the safety and profit for the landlord – for the most part. Unfortunately businesses do fail. While high-traffic and high-earning tenants can provide a huge boost to commercial real estate and provide an incentive to landlords to obtain long-term leasing, negotiating a lengthy lease agreement for a high-risk business is not nearly as valuable.
Provisions Should Account for Particular Circumstances
Important clauses for landlords in a commercial lease agreement to acknowledge are the use clause, the exclusivity clause and provisions regarding assigning and subletting:
- Use clause: This clause accounts for what the leased property can be used for. As an example, a lease agreement may specify the property can only be used for restaurant space, retail or warehousing. Limiting the use of the property can help a landlord lease similar space to similar businesses without major overhauls to the property.
- Exclusivity clause: This clause will likely be requested by the tenant when worried a landlord could lease nearby commercial space to a competitor, such as in a strip mall. This type of clause, from the landlord’s perspective, can be included but should be as specific as possible to avoid preventing the landlord from renting to non-competitors.
- Assigning and Subletting: Subletting commercial space can work for both tenant and landlord. The landlord can still receive regular rent, despite the fact that the original tenant is no longer in business or is unable to afford the rent. However, the landlord should not give full discretion to the tenant to sublet. Restricting the ability of a tenant to sublet, where appropriate, can protect the landlord’s interests in the commercial property and keep the space appropriate to its intended purpose.
This is a very brief overview of some of the main points of negotiation in a commercial lease agreement. Experienced legal representation is essential to ensure that a landlord’s lease agreement accounts for all eventualities and protects the landlord’s rights and property.