Commercial  Leases: Making Sure Your Lease Protects You

Whether you are a tenant contemplating leasing office space and wanting to negotiate the best deal in a rough economy, or you are a lessor worried about the potentially liability associated with leasing space to a tenant commercially involved with hazardous substances, we can help draft, review and/or negotiate a lease that will protect you.

Commercial Leases: Essential Terms for Negotiation

A commercial lease enables a tenant to rent a space or a building for the purpose of a business. This differs from a residential lease that is for renting a room, an apartment, or home as your home. Beyond this, these two types of leases differ in several ways. Firstly, in a commercial lease, the consumer is less protected. In California, there is no rent or eviction control, no upper cap on the security deposit, and the tenant can be made responsible for maintenance of the property. Secondly, there is no standard form such as in a residential lease and it can instead be customized for the landlord’s needs. The lack of standardization necessitates close examination of all commercial leases, but also enables a lot more negotiation and flexibility. Lastly, a commercial lease is a lot harder to break.

To successfully negotiate a commercial lease, understanding the legal clausesis essential. The following topics are commonly addressed in a commercial lease.

Parties

This clause may also be called “Lessor and Lessee” or “Landlord and Tenant.” It is important to review how the landlord and tenant are named to avoid personal responsibility. If you are an LLC or a corporation, you want the tenant termed as such, not in your personal name.

Premises

This clause will describe and identify the space or property that you are leasing. It can as simple as a street address if you are leasing a building. It is important to review the premises clause to define precisely what you have access to. If you are only renting a space within a building, you may want to specify whether you have access to the laundry room, the kitchen, conference rooms, storage space, etc.

Term or Length of Lease

The term clause refers to the length of the lease. This clause will specify not only when your business moves into the property, but also when you must begin to pay rent and when you need to have insurance. Careful scrutiny of this clause is necessary to evade excessive costs to your business. For instance, you probably want to avoid paying rent or insurance prior to moving in.  To avoid this, term clause may stimulate separate start dates for moving in, insurance, and rent payments. This clause may also include options to renew the lease.

Rent

The rent clause foremost specifies the amount paid monthly. The landlord may also include a clause here for an annual increase in rent. Rent payments may be categorized as a “gross lease” or a “net lease”. A gross lease means that rent includes utilities, repairs, insurance and taxes. A net lease requires the tenant to pay for these things separately. An allowance for improvement and alterations may also be negotiated as a part of the rent. Whether the rent includes these expenses or an allowance may be specified in the following two clauses.

Improvement and Alterations

Often the needs of a business will necessitate the customization of the leased space. An improvements and alterations clause will define what work can be done, who can do the work, who will pay for it, and when it can be done.

Maintenance, Utilities, Code Compliance

The maintenance clause will stipulate duties concerning care of the rented space for which the tenant is responsible. All provisions regarding the utilities are covered in the utilities clause. There may also be a clause requiring the tenant to keep the rented property ‘up to code.’ Prior to signing a commercial lease, it is necessary to be clear on exactly what compliance with code means in your circumstance.

Use and Exclusives

These clauses will limit how you use the space. No use clause is ideal for the tenant, but is not always the case. However, a landlord may restrict your business activity through a use clause due to concern over liability, personal discretion, or because the landlord signed an exclusive clause with another tenant. An exclusive clause ensures that you are the only tenant allowed to do a particular type of business. This clause is ideal for preventing competing businesses from moving in next door. An ice cream vendor might sign an exclusive clause with a landlord. The next tenant that moves into the building will have to sign a use clause requiring the tenant to not sell ice cream.

Subleases

It is typically favorable for the tenant to ask for a sublease clause allowing him or her to assign the space to another tenant. In the event that your business is unsuccessful or you need to move out, someone else can pay the rent for you without breaking the contract.

Other clauses that may be important in your circumstance are parking and signs, insurance, security deposit, and security arrangements. For instance, if your business is a retail store, it will vital to your success to include an allowance for business signs. In security deposit clause, you may want to opt for a “Letter of Credit” from your bank, in which your bank reserves the agreed amount of your funds instead of paying the deposit up front.

The flexibility of a commercial lease is a double-edged sword, but can used to the tenant’s benefit. Generally, your bargaining power is restricted by the value of the property. If demand for commercial spaces is low in the area, then your negotiation power is strong, but if demand is high, then your leverage will be diminished. Knowing where your leverage will be used best can be tricky, but can greatly affect the success of your venture. If your business is a retail store or a coffee shop, location will be very important. You can’t predict the success of your enterprise, so you may want help deciding between a long-term lease, short-term lease with renewal options, and a short-term lease. If you want to be the only coffee shop in the building, you consider using most of your bargaining power for an exclusive clause. Enlisting legal help to negotiate a commercial lease can be the first step to a profitable business.

Commercial Leases: Essential Terms for Negotiation

A commercial lease enables a tenant to rent a space or a building for the purpose of a business. This differs from a residential lease that is for renting a room, an apartment, or home as your home. Beyond this, these two types of leases differ in several ways. Firstly, in a commercial lease, the consumer is less protected. In California, there is no rent or eviction control, no upper cap on the security deposit, and the tenant can be made responsible for maintenance of the property. Secondly, there is no standard form such as in a residential lease and it can instead be customized for the landlord’s needs. The lack of standardization necessitates close examination of all commercial leases, but also enables a lot more negotiation and flexibility. Lastly, a commercial lease is a lot harder to break.

To successfully negotiate a commercial lease, understanding the meaning of the terms of the lease is essential. The following topics are commonly addressed in a commercial lease.

Parties

This clause may also be called “Lessor and Lessee” or “Landlord and Tenant.” It is important to review how the landlord and tenant are named to avoid personal responsibility. If you are an LLC or a corporation, you want the tenant termed as such, not in your personal name.

Premises

This clause will describe and identify the space or property that you are leasing. It can as simple as a street address if you are leasing a building. It is important to review the premises clause to define precisely what you have access to. If you are only renting a space within a building, you may want to specify whether you have access to the laundry room, the kitchen, conference rooms, storage space, etc.

Term or Length of Lease

The term clause refers to the length of the lease. This clause will specify not only when your business moves into the property, but also when you must begin to pay rent and when you need to have insurance. Careful scrutiny of this clause is necessary to evade excessive costs to your business. For instance, you probably want to avoid paying rent or insurance prior to moving in.  To avoid this, term clause may stimulate separate start dates for moving in, insurance, and rent payments. This clause may also include options to renew the lease.

Rent

The rent clause foremost specifies the amount paid monthly. The landlord may also include a clause here for an annual increase in rent. Rent payments may be categorized as a “gross lease” or a “net lease”. A gross lease means that rent includes utilities, repairs, insurance and taxes. A net lease requires the tenant to pay for these things separately. An allowance for improvement and alterations may also be negotiated as a part of the rent. Whether the rent includes these expenses or an allowance may be specified in the following two clauses.

Improvement and Alterations

Often the needs of a business will necessitate the customization of the leased space. An improvements and alterations clause will define what work can be done, who can do the work, who will pay for it, and when it can be done.

Maintenance, Utilities, Code Compliance

The maintenance clause will stipulate duties concerning care of the rented space for which the tenant is responsible. All provisions regarding the utilities are covered in the utilities clause. There may also be a clause requiring the tenant to keep the rented property ‘up to code.’ Prior to signing a commercial lease, it is necessary to be clear on exactly what compliance with code means in your circumstance.

Use and Exclusives

These clauses will limit how you use the space. No use clause is ideal for the tenant, but is not always the case. However, a landlord may restrict your business activity through a use clause due to concern over liability, personal discretion, or because the landlord signed an exclusive clause with another tenant. An exclusive clause ensures that you are the only tenant allowed to do a particular type of business. This clause is ideal for preventing competing businesses from moving in next door. An ice cream vendor might sign an exclusive clause with a landlord. The next tenant that moves into the building will have to sign a use clause requiring the tenant to not sell ice cream.

Subleases

It is typically favorable for the tenant to ask for a sublease clause allowing him or her to assign the space to another tenant. In the event that your business is unsuccessful or you need to move out, someone else can pay the rent for you without breaking the contract.

Other clauses that may be important in your circumstance are parking and signs, insurance, security deposit, and security arrangements. For instance, if your business is a retail store, it will vital to your success to include an allowance for business signs. In security deposit clause, you may want to opt for a “Letter of Credit” from your bank, in which your bank reserves the agreed amount of your funds instead of paying the deposit up front.

The flexibility of a commercial lease is a double-edged sword, but can used to the tenant’s benefit. Generally, your bargaining power is restricted by the value of the property. If demand for commercial spaces is low in the area, then your negotiation power is strong, but if demand is high, then your leverage will be diminished. Knowing where your leverage will be used best can be tricky, but can greatly affect the success of your venture. If your business is a retail store or a coffee shop, location will be very important. You can’t predict the success of your enterprise, so you may want help deciding between a long-term lease, short-term lease with renewal options, and a short-term lease. If you want to be the only coffee shop in the building, you consider using most of your bargaining power for an exclusive clause. Enlisting legal help to negotiate a commercial lease can be the first step to a profitable business.

No matter how detailed a lease is or how thoroughly it was reviewed, disputes can still arise concerning the provisions of the lease. When these disputes arise it is important to seek a qualified real estate attorney. Over his 30 years in practice, Richard Korb has personally negotiated and litigated a plethora of real estate cases in and out of court and he will personally handle your matter thoroughly and practically with the goal of saving you time and money.