Commercial Lease Terms to Know When Reviewing a Contract

commercial lease terms to knowSo you've found a commercial space that you liked, the landlord presented you a proposal, and you just finalized negotiating the base terms and conditions. Next the landlord will draft a lease contract for you to review, comment on, and sign. in reality landlords hope that you don't actually review it and just sign on the dotted line. They would rather have it 100% their way.

The commercial lease contract is a legal binding contract between you (tenant) and the landlord. If you do not pay rent or breach the contract in any way the landlord is able to come after you for damages. Before signing a commercial lease make sure to read the contract AND have an attorney review it. You want to understand some of the key commercial lease terminology before signing. If you don't have your attorney explain them to you.

Typical Commercial Lease Terminology

Parties to the Lease

Are the tenant and the landlord. If you're operating as a corporation or LLC or other entity then use that on the lease. You may have to sign a personal guarantee to rent commercial space however you can still use your business name as the Party. Make sure to get the names right. Are you dealing with an individual, partnership, or corporation? Make sure the person signing the lease on either side has legal authority to bind the entity into a contract. Ask for a copy of the partnership agreement or a corporate resolution.

Demised Premises

This is the description of the space you are leasing. Make sure you understand what square footage you are actually paying rent on. Ask to have an exhibit / siteplan and floor plan attached to the lease so both parties can visualize where the premises is located in the building. You need to know the exact size, address, and list of tenant improvements existing or to be provided by landlord.

Rent

How rent is calculated and how it should be paid. Spells out the day and month rent is to be paid and where. It will also show the initial year base rent amounts, yearly escalations, and operating expenses (aka NNN).

Term

Most leases have a commencement date and termination date. These dates are subject to negotiation. This is also where you may cover early access, options to extend, or surrender inspection & condition

Deposit

Landlords typically want some sort of security deposit. This will define the amount as well as the form of payment. Could be cash, check, letter of credit, etc.. This will also define when the security deposit will be reimbursed.

Holdover

If a new lease or an extension of the current lease has not been negotiated by the time the lease term expires, the tenant is said to be holding over. As an inducement to the tenant to come to an agreement with the landlord the holding over clause imposes a penalty in the form of a rent premium on the tenant. This is typically  150% to 200% of the last applicable rent under the original lease.

Use

To be effective the use clause must state the specific purpose for which the premises are leased and prohibit all other uses. The clause is primarily intended to ensure that uses are restricted to functions for which the building was structurally designed and that they conform to city zoning ordinances. Tenants must also be in compliance with city and state laws.

Taxes

Tenants will be charged for taxes and assessments. This clause sets forth which taxes are included as the tenants responsibility. Most common are real estate taxes assessed by the city or county. This discusses the basis for determination, pro-rate share, taxes on tenants property, and the tenants right to contest (if negotiated).

Utilities

Defines who is responsible for paying the utilities. In a “net” lease the tenant pays the entire cost of all utilities. The negotiable part is who is responsible for bringing the utilities to the premises and maintaining their physical condition. In a gross lease the utilities are paid for by the landlord then allocates the cost evenly to all tenants based on the square footage of the space.

Assignment & Subleasing

In an “assignment” all rights and obligations in the lease are transferred to another party (the assignee) and the primary (transferring) tenant (the assignor) has no ongoing responsibility. Under a “sublease” the primary tenant (the sublessor) remains responsible to the landlord and the subtenant is responsible to the primary tenant.

Repairs & Maintenance

Defines who is responsible for making the repairs and maintenance to the premises and the common area. Most leases require that the tenant maintain the premises and the landlord is responsible for the property's structural repairs and common area. 

Insurance

Defines the type and amounts of insurance that tenants are required to have. Tenants typically need personal property and general liability. Every landlord has different requirements. This also 

Condemnation

If a property is taken by eminent domain tenants and landlords need to determine how this will be handled. Situations are different. What if an entire building was taken under eminent domain?

Destruction of Building

Describes the process if a building is damaged by fire or some other catastrophe. Landlords typically get to make this call however tenants can negotiate this item.

Estoppel

Anytime a building is being purchased or refinanced the bank will require proof that the tenant leases are in full force and effect. They do this with an estoppel certificate that each tenant must sign confirming the lease expiration date, size of space, rental rate, etc…

Default

Defines what happens if the tenant or landlord break the agreement. For tenants the default falls into either financial or behavioral. Financial is if they don't pay rent or additional rent. Landlord default language is typically very short so make sure the landlord has some skin in the game if they don't deliver what is expected in the lease contract.

Attornment

This means a Tenant agrees to accept a new owner as landlord. When a property is sold or exchanged, or if a ground lease is terminated before it's term expires the lease is transferred by assignment to the new owner. Without this clause the tenant could refuse to honor the new owner as the landlord.

Subordination & Nondisturbance

It may be impossible for the landlord to obtain financing without this lease provision. Lenders consider the lease to be a lien on the property. Absent a subordination clause, leases signed before a mortgage or trust deed could take precedence. Lenders want their lien to be superior to any others. However the tenant may negotiate a nondisturbance clause providing that if the tenant is not in default its lease will not be canceled in the event of a foreclosure. Major tenants will want this agreement in writing from the lender before agreeing to subordinate their lease to a mortgage.

Quiet Enjoyment

Means the right to use leased property without disturbance of possession by the landlord.

Arbitration

Courts are overloaded. Jury trials are time consuming. Attorneys are expensive. Litigation is costly. As a result some landlords prefer arbitration to resolve disputes. The number and qualifications of the arbitrators, and how they are paid is spelled out in this provision. 

 

 

 

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