Commercial leases: basics explained
If you own a business or would like to own a business, most likely you’ll enter into a commercial lease at some time during the life of that venture. While each lease is different and must be reviewed carefully, commercial leases typically cover a core group of issues.
If you’re looking at leasing commercial property for your business, you need to have at least a basic understanding of those issues.
What space are you leasing? A commercial lease should clearly define the space the tenant will lease, also known as the “demised premises.” Leases typically include both a street address and site plan showing the demised premises and set the square footage of the demised premises. Make sure the lease clearly defines the demised premises and that the demised premises described in the lease matches the demised premises you expect to receive. Make sure, too, your demised premises has sufficient parking spaces and sign rights to allow you to operate your business.
Is this a gross lease or triple net lease? A commercial lease should tell you what’s included in the rental amount you pay the landlord. Most leases are gross leases or triple net leases or fall somewhere in between. Unfortunately, not all leases state explicitly into which category they fall, so you need to read the lease carefully. A gross lease typically is all-inclusive, meaning the tenant pays the landlord one sum and the landlord is responsible for payment of real estate taxes, insurance and maintenance expenses. In a triple net lease, the tenant pays a set rental amount to the landlord, but also pays a share of the landlord’s real estate taxes, insurance, maintenance expenses and building utilities. Understanding the difference between a gross and triple net lease is particularly important when comparing multiple spaces.
How is my rental rate determined? A commercial lease should clearly define what your rental rate will be for the entire term of the lease. In most leases, the annual rental rate increases from year to year by what’s known as an “escalator percentage.”
What can you do in your demised premises? A commercial lease likely will tell you what you can and can’t do in your demised premises. Office leases often state the space may be used for general office use and no other purpose. Retail spaces often get more specific.
If it breaks, who fixes it? A commercial lease should clearly define who’s responsible for repairs of the premises, the building, the parking lot and such core systems as plumbing, electrical and HVAC. Keep in mind the question here is not who pays for the repairs, but who’s responsible for making sure the repairs are made in the first place.
Will there be tenant improvements and, if so, who pays for it? Commercial space tends to be rather generic and could require modifications — or “tenant improvements” — for use by a particular tenant. Accordingly, a commercial lease often states whether the landlord or tenant will make improvements to the premises to get ready for the tenant’s occupancy. When the landlord pays for the improvements, the amount spent is called an “allowance.” If improvements are contemplated, the lease must clearly state what improvements will be made, who will complete the improvements, when the improvements will be complete and the amount of any allowance. This can also be an expense to be paid back to the landlord over a period of time.
Be sure to take your time while looking for commercial space. Factor in everything that’s important for your business and the area in which you’d like to see your business grow. A lease is a legal document with potentially far-reaching consequences. We always recommend that leases be reviewed and approved by competent legal counsel.