Real Estate

Commercial Leases

By Janet Portman, Attorney
A commercial lease should be the result of bargaining between the landlord and tenant. Like any bargain, neither side will get everything it wants--but a good result is at least a lease in which there are no surprises.

Talk to a Local Commercial Leasing Attorney

A commercial lease involves renting land and/or property to a tenant who will use the premises to carry on a business. Unlike a residential lease, a commercial lease is subject to relatively few legal restrictions. For example, almost every state regulates how much security deposit a residential landlord may collect, when the landlord may enter the tenant’s home, the condition of the property at the beginning of the rental term, and exactly what repairs the landlord must do. By contrast, commercial leases address these issues according to the parties’ relative bargaining powers. This means that commercial leases come in wide varieties; there is no such thing as a “standard lease.”

Nonetheless, commercial leases do tend to contain a key group of core clauses (and must have them in order for the lease to be enforceable by a judge). Below, we’ll list the common clauses and explain them; then explore other clauses that often appear.

Before going further, a word about the “anything goes” nature of commercial leases: Not quite. A judge will not enforce clauses that are against public policy or law. For example, a clause that demanded a usurious rate of interest on overdue payments will run afoul of the anti-usury laws in this country, and would not be enforced. The same fate would befall a clause prohibiting the tenant from subleasing to a member of a minority (or other protected class), for upholding such a clause would violate our anti-discrimination laws.

Essential Commercial Lease Clauses

The following clauses, or paragraphs, need to appear in a commercial lease to make it enforceable by a judge.

Names of the landlord and tenant

The landlord and tenant must each be named in the lease. Each should use its business name, which means that if either is a partnership, LLC, or corporation, those designations should be included. For example, the landlord might be “Acme Properties, LLC,” and the tenant, “Superior Vision, Inc.” Failing to use your business name and using your personal name instead could result in the rights and obligations of the lease attaching to you, personally.

Description of the premises

Obviously, you’ll need to state the address of the premises. If the rental is part of a multi-tenant building or complex, the premises clause should make it very clear where it is. Office building leases often include square footage, as do warehouse and some retail rentals.

Rent

The amount of rent, how it’s calculated, and when it’s due are critical issues to cover. In its simplest form, commercial rent can look just like residential rent: A specific, unaltering sum of money due on the first of the month, period. But many commercial leases don’t work that way. Instead, they begin with a base rent, then add the tenant’s portion of some or all of the landlord’s operating expenses. Called “net” or “triple net” leases, these can become quite complicated to understand and calculate. Unless this clause is crisp, a judge will have a hard time applying it should there be a dispute later.

Lease term

This clause specifies when the lease begins and ends. Commercial leases typically last for a period of years—three to five, and even 15 to 20 years are not uncommon lease terms.

Additional Common Lease Terms

These clauses often appear in commercial leases, though they are not essential.

Security deposit

Like their residential counterparts, commercial landlords typically collect a deposit, though the amount is not regulated by law. The deposit clause should specify how the landlord may use the deposit during the tenancy, under what conditions it will be returned, and whether the landlord will pay interest on it.

Instead of a deposit, the landlord might accept a letter of credit, which is a statement from the tenant’s bank that, if asked by the landlord, it will pay up to a certain amount to cover specified “draws” by the landlord. There’s little advantage to a letter of credit over a security deposit from the tenant’s point of view, because they require the tenant to post collateral with the bank (because they’re essentially a loan).

Use clause

Most leases will describe the permitted use of the premises, which will limit the activities the tenant can undertake. For example, a retail lease in a multi-tenant situation may prohibit certain types of sales, perhaps to honor other tenants’ “exclusive” promises in their leases.

Utilities

If the tenant will pay for part of the utilities in a multi-tenant building, this clause will set out the allocation procedure. It may be according to total square feet rented, type of business or number of open business hours, or some other method.

Maintenance

A commercial lease should specify who does what when it comes to building repairs. Unlike residential leases, many commercial leases place significant repair and upkeep responsibilities on their tenants.

Assignment and subletting

Tenants sometimes wish to sublet some or all of their space to other tenants, or to completely turn over the space for the rest of the lease term (this is known as assigning). Most leases require tenants to obtain the landlord’s consent before doing either.

Dispute resolution

Many leases require the parties to attempt to settle legal disputes through mediation, before resorting to formal legal action. The lease may also call for binding arbitration in place of going to court.

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