A Commercial Lease is a type of lease designed for business purposes and covers items including security deposits, taxes, expenses, obligations for repairs and construction of the premises to be leased. Commercial leases are granted for various purposes including office, retail, warehouse, pad, or "ground". Pad or ground leases are often used for restaurant premises for premises where the tenant will be responsible for building and maintaining the structure. Usually, a commercial lease is given for a term office to twenty years with fixed increase in base rent.
Commercial leases differ from typical home or apartment leases in several important ways. While the basic concepts and terms of a commercial lease are similar to a lease you might have signed for an apartment, there are still differences between commercial and residential leases that you need to be aware of.
Commercial leasing typically involves much bigger and more expensive spaces, and the leases often extend for periods much longer than a year. Commercial leases may also include clauses that address certain expenses unique to the business, such as extensive utility use, and there are often express restrictions on how property can be used.
Residential leases are often highly regulated with some terms that cannot be changed by law—even if both parties agree to waive those terms. On the other hand, commercial leases have virtually no restrictions beyond basic contract-law.
The differences between commercial and residential leases also carry into dispute resolution. A residential lessee might be able to rely on local housing laws and consumer protections to help protect tenants' rights. On the other hand, a commercial lessee generally has no rights other than what is explicitly stated in the lease agreement.
A predetermined minimum amount that the tenant must pay every month, base rent functions separately from operating expenses and revenue. It is almost always a fixed amount and is usually quoted on a square foot per year basis.
This monthly expense can be a variable line item that a tenant is charged apart from usable square footage or other typical rent costs. Specific expenses like after-hours services, HVAC, common area maintenance (CAM) fees, and percentage rent are often considered an additional rent cost and not included in the base rent.
Also known as abated rent, free rent refers to a specified number of rent-free months a landlord offers a tenant, usually at the very beginning or conclusion of a lease. There are rare occasions, however, when such benefits can be spread throughout the lease term.
A popular term across many facets of the real estate industry, turnkey is used to describe a space that is ready to move into. If time is of the essence and you have a narrow window to choose new office space, agree to terms, and move into the new space, a turnkey property can save you much-needed time and aggravation, particularly if you do not need to make any of your own upgrades to the space.In a turnkey property, all of the wiring, fixtures, flooring, and design or decorative items like paint and carpet are already in place.
Usable square feet is a metric that defines the square footage that is rented and exclusively used by the tenant. In other words, usable square footage is the area of square feet used directly and solely by the tenant, including private restrooms available to the tenant alone, closets, storage, and any other areas of which only the tenant has access.
Rentable square feet is a term that refers to common areas that are shared amongst multiple tenants along with usable square feet. More concisely, rentable office space is calculated by adding the usable square feet of the office space plus a prorated share of any common areas. Such common areas typically include shared restrooms, hallways, staircases, lobbies, and recreational or common areas.
The landlord’s lease will usually include a Maintenance andRepair clause that concerns your duties to care for your own rented space (or for the entire building, if you are the sole tenant). You’ll want this clause to specify (as much as possible) what you are—and are not—required to do to keep up the property and building, and what the landlord’s duties are. The way the responsibilities are shared depends on common sense and your own negotiating power.
Commercial leases typically require the landlord, the tenant or, in most cases, both to carry insurance to cover the building and the parties in the lease. The insurance clause in the lease specifies what coverage is required and who is responsible to pay for it. Some insurance requirements are common, such as property damage and liability coverage, while others are more specific to leased space, such as loss of rent or business interruption coverage.
Generally, the landlord will take responsibility for the structure of the building, which includes but is not limited to the roof, exterior walls, and major systems. Tenant should assume duty to keep the interior up and running, as well as grounds appearance. Clear obligations upfront will help the commercial agreement be a positive one.
The lease should also spell out signage and similar rights.
The Americans with Disabilities Act (ADA) requires business spaces that are open to the public to be accessible to those with disabilities. The law's requirements depend on the size of the business, the type of business, and the age of the building or time since it was last renovated.
Tenants have primary responsibility for ensuring their business is ADA compliant. However, they may wish to negotiate for a lease that requires the landlord to make ADA upgrades or to maintain ADA compliance, such as continued elevator access.
The landlord usually does not have the right to amend the lease on their own. To make changes, they would typically need to wait until the next renewal or offer the tenant something to get them to agree to the changes.
The primary exception would be if the lease itself contains some sort of option. For example, the landlord might include a clause that allows them to terminate the lease if they sell the property.
In short, any changes need to have the tenant's signature either as an amendment or as an option they agreed to within the original lease.
Just like tenants have the right to expect their landlord to follow the lease, the landlord also has the right to expect tenants to follow the lease.There are, of course, exceptions to the rule.
Each business will have a unique set of circumstances surrounding why they need to break the lease early. Startups are especially susceptible to change and are often in a greater need for flexibility to match their uncertain future. If you have a long-term lease, you will be liable for any rent payments for the remainder of the lease. This could be a lot of money, and many commercial landlords have the financial wherewithal to sue over broken leases.
A sublease occurs when the original owner does not lease the premises to you, but there is another person or entity in between you and the landlord. That is, the property owner rents to someone else, and then that person rents to you. Subleases are common in both commercial and residential properties. However, there are some special considerations that you should be aware of when entering into a commercial sublease. Be sure that you understand the risks and benefits involved.
If the tenant and landlord can come to a mutually beneficial agreement, tenants may also be able to modify the existing lease.This is essentially a new lease even though the modified lease agreement may refer back to the original lease.
In the event of a lease dispute, the resolution process depends on the type of dispute.
If the tenant does not pay rent or pays late, the landlord will generally be able to take collections action or begin eviction proceedings. Tenants should be aware that commercial evictions are often much faster and have fewer protections than residential leases. In addition, the landlord may have the right to change the locks prior to going to court if the tenant has not paid rent.
Disputes about lease terms often arise when the landlord and tenant cannot agree on who is responsible for a specific item.Often, this occurs when a provision in the lease was too vague or did not clearly include something that a party thought it did.
Many commercial leases include an arbitration clause for resolving these types of disputes. An arbitration clause requires the parties to use and accept the decision of an arbitrator rather than filing court proceedings.
No matter the type of property you own, you can count on the experts at Evanco Realty Advisors for the very best in full-service commercial administration. We provide everything you need to minimize your ownership workload and maximize the return on investment for each of your commercial properties. We provide peace of mind to owners; implement excellent property management services that enhance value for landlords.
Call us today at (619)814-1688 to see how our commercial property management strategies can help you!
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