Entering into a commercial lease can be an exciting step for a business because it means giving the business a brick-and-mortar location. However, this type of contract is also a very big responsibility for a business owner and, before entering into a commercial lease agreement, it is important for a business owner to consider the obligations they are undertaking.
Since commercial leases are generally open to much more negotiation than their residential counterpart, business owners must be up to speed and ready to negotiate certain terms so that they can confidently enter into an agreement that will best fit their business’s needs. There are fewer legal guidelines that commercial landlords must abide by than with residential leases, so a business owner has more latitude, but is often bargaining with a much larger entity.
It is true that every term in a commercial lease agreement deserves its own thorough consideration. This is why it is imperative to seek the opinion of an attorney with significant experience in reviewing and negotiating these contracts. Even one small change in the lease’s terms may make a big difference somewhere down the line in a five- or ten-year lease. This post will address the top four lease terms that every business owner should be able to identify and understand when reviewing a commercial lease agreement.
1. Lease Term
One of the most notable differences between a residential and commercial lease is the length of the lease term. Generally, a residential lease has a lease term of only one year. However, most commercial leases have a lease term of at least 3 years and, more often, the lease term is for 5 years and sometimes 10. Regardless, this can be a negotiable item for a business owner.
Further, prospective tenants should identify whether there is any renewal opportunity contained in the lease and, any triggering events or requirements associated with such renewal. This is important information to be aware of because the lease agreement may provide for automatic renewal at the expiration of the prior lease term. Depending on the future goals and direction of your business, this could cause an issue. For example, a business owner may not want the lease term to automatically renew, but if they ultimately do not follow the lease terms, they may be required to remain in the lease until the expiration of the renewed term.
The first item likely to be discussed between a prospective tenant and a landlord will be the amount of the rent, and whether there is any security deposit required. Most lease agreements provide for monthly rental payments; however, it is not uncommon, especially in the commercial lease context, for rent to be due annually. Further, not only is the base rent amount a key item to consider, but also any allowable increases (“Rent Escalation”) and how much of an increase is permissible. A business owner will likely want to negotiate a cap on any future increases in rent.
In the event there is ever default in payment, make sure to identify and note how many days, if any, are permitted before a payment is considered late, and thus, a default of the lease. Some landlords impose significant penalties in the event of a lease payment that is only a few days late.
3. Other Costs and Fees
This category can encompass a very broad range of types of fees that could be included in a commercial lease agreement. Therefore, this post will only be able to touch on a few of the more common costs and fees that you may face in your review. For example, you will likely encounter language in the lease agreement relating to Common Area Maintenance charges (or “CAM”). CAM charges are based upon the costs incurred by the landlord in owning and managing the common areas of the property. As a way for the landlord to be reimbursed for their efforts, a portion of these costs are distributed to each commercial tenant on the property. Generally, CAM charges include costs associated in maintaining common areas such as the parking lot, landscaping, hallways, sidewalks, bathrooms, and elevators. By including CAM charges, commercial landlords are often able to pass off almost the entire cost of owning and maintaining the building onto their tenants. There may be ways to minimize some of these costs, or to audit the landlord’s expenses, to ensure that you minimize paying for any more than required.
Another cost that a business owner will likely want to negotiate is the opportunity for improvements. Negotiating an improvement allowance allows a new business to be able to alter their leased space to fit the needs of the business. For instance, a lease may state that the commercial landlord will reimburse the tenant for construction costs required to build out the space to the tenant’s requirements. There are typically specific deadlines and requirements for such reimbursements.
One of the most frequent issues we encounter regarding commercial lease agreements is related to the termination clause. This is because both landlords and tenants alike often find themselves in a situation where they are questioning whether the relationship with one another should continue. Therefore, prior to entering into any commercial lease, both parties should be aware of the grounds for termination of the agreement. For example, a landlord may see an opportunity to lease a space to a new tenant for a higher rent. The existing tenant’s rights are going to be governed by the lease and any termination clause. The tenant may have the right to terminate the lease if the landlord does not uphold its obligations. These should be clearly spelled out because landlords do not have the same obligations to provide habitable premises in the same way that residential landlords do.
Commercial leases are often dozens of pages long, contain unclear provisions, and attempt to relieve commercial landlords of as many obligations as possible. For this reason, it is vital to have a lease reviewed prior to signing it – your business may literally depend on it.
Dye Culik PC is a Charlotte, North Carolina business law firm representing small-to-medium-sized businesses, entrepreneurs, and other enterprises. If your business has a commercial lease – or any other contract to sign – contact us so that we can apply our knowledge and experience to your agreement.