Commercial Leases

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Gavel and Scales

Whether you’re talking about a residential lease, that is, a lease for a place to live, or a commercial lease, a place to work, the basic idea is the same: a property owner, or the “landlord” or “lessor,” lets a “tenant” or “lessee” use the property in exchange for payment of some sort by the tenant, usually rent money. People lease commercial space for many of the same reasons they rent residential space. For example, maybe they can’t afford to buy land, or maybe they don’t want to have to deal with the maintenance and repair responsibilities that go with owning land.

Aside from those things and some other basic similarities, commercial leases are different from residential leases. For example, commercial lease are often for a longer period of time than residential leases, tenants often have more costs and expenses, and there are usually restrictions on how the premises can be used.

In most states, there are laws that control what a commercial lease can and can’t contain, and of course the laws vary from state to state. So, before you sign a commercial lease, be certain to read it carefully, and check to make sure that it follows the laws in your area, or let your real estate attorney look at it.

Necessary Lease Provisions

Commercial leases usually run for more than one year, and it’s not uncommon for them to run for periods of anywhere from 3 to 99 years. Like residential leases, many states require that commercial leases be in writing if the term is for one year or longer.

Like a residential lease, there are several things that a commercial lease must contain in order for it to be valid and enforceable, such as:

  • The names all landlords and tenants
  • A description of the premises being leased, including street address and building name or number, as well as any common areas, such as hallways, lobbies, elevators and parking areas
  • How much rent the tenant has to pay, a schedule of any increases (many commercial leases have rent that increases every year or every few years), and when and how it has to be paid (check or money order, for example), and any charges for late for late payments
  • The length, or “term,” of the lease

Usually, if the lease has to be in writing, it will be invalid and unenforceable if it doesn’t clearly state what property is being leased, for how long, and how much rent has to be paid and when.

Typical Lease Provisions

Most commercial leases are very long because they try to cover every aspect of the landlord-tenant relationship, that is, exactly what each party’s rights and obligations are with respect to the property. For example, most commercial leases will specify things like:

  • The amount of the security deposit that the tenant has to pay before moving in, as well how the deposit will be refunded and under what circumstances the landlord can keep portions of it, such as for damage to the property caused by the tenant
  • How the utilities will be apportioned among multiple tenants and whether the tenant has to pay them directly to the utility or service provider, or if they are included in rent
  • Who’s responsible for designing, building and paying for any improvements the tenant wants or needs in order to conduct his or her business
  • How much the tenant will have to pay for maintaining common areas, such as parking areas and elevators
  • Who’s responsible for insuring the property against loss from theft, fire and natural disasters, like flooding and tornados
  • The fact that the premises are “suitable” for the tenant, that is, the premises are structurally safe and sound and there are no defects that would prevent the tenant from using the premises for his or her business
  • If, how and when either party can end the lease early, say, for example, if the tenant’s business out-grows the leased premises
  • If the tenant can “sublet” the premises, that is, rent it to someone else
  • When the landlord can enter the leased premises, either with or without the tenant’s permission
  • If and where the tenant can erect a business sign
  • Who’s responsible for paying property taxes
  • If the lease automatically renews after the initial term expires
  • The tenant’s duty to “restore” the premises to its original condition when the lease expires, by doing things like removing his or her personal property, furniture, equipment and trade fixtures, like signs
  • The requirement that the tenant can use the premises only for the commercial use specified in the lease, so if the tenant rents space to operate a delicatessen, the landlord could prevent him or her from later using the premises as a beauty salon

Prohibited Provisions

There are several things that a commercial lease can’t contain. For instance:

  • Like residential leases, commercial leases can’t state that persons of various race, color, sex, religion or national origin can’t be tenants
  • The landlord (or tenant, for that matter) can’t eliminate his or her obligation to follow the Americans with Disabilities Act (ADA) by making the premises that are open to the public accessible to disabled or handicapped persons
  • The landlord can’t give him or herself greater rights to enter or access the premises without the tenant’s permission than the rights specified by state law, or give the tenant fewer remedies than those provided by state law if the landlord enters the premises unlawfully

Questions for Your Attorney

  • When I signed a lease last month, my landlord assured me that the property was zoned for my type of business. I just found out that the property is not zoned for my business. What can I do?
  • My landlord is supposed to keep the elevators working in our building, but they keep breaking down, making it hard for my employees and customers to get to our offices. What can I do?
  • When I wrote my lease, I forgot to add a provision that the tenant couldn’t assign or sublet without my consent and without me getting some type of guarantee from the tenant or sub-tenant. Can I add this in to a current lease?

    Related Resources on lawyers.comsm

    - Residential Leases
    - Find a Real Estate Law Lawyer in your area
    - State Real Property Codes & Statutes
    - Visit our Landlord & Tenant message board for more help

  • Commercial Leases

    Talk to a Local Commercial Leasing Attorney

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    Gavel and Scales

    Leasing a commercial space instead of committing yourself to owning commercial real estate can be an excellent move. But there are fewer tenant-friendly laws when it comes to commercial leases. In many states, commercial leases are not covered under consumer protection laws that give residential tenants a large degree of protection from unscrupulous landlords. It’s assumed that commercial leases are contracts between knowledgeable business people, and so there’s less need for state regulation of such leases.

    So, before you lease space for your small business, it’s critical that you carefully examine every aspect of the lease and renegotiate unfavorable terms before you sign it. And, depending on your experience and skill, it might be a good idea to get help from a business or real estate law attorney to help you negotiate the best deal.

    Some Important Lease Provisions

    Your commercial lease should be in writing and should include the following details:

    • How much rent is due, including any scheduled increases, which are commonly called “escalations.” You’ll want to know the going rate for space in the neighborhood before you begin negotiating. It also helps to let the landlord make the first offer, and ask for a lower rent than you think you can get initially. Escalations should be for specific dollar amounts or tied to a known method of calculation, such as a cost of living index.
    • How long the lease runs, which is known as the lease “term,” and it should cover when it begins and under what conditions you can renew the lease. A shorter lease means less commitment from you, but also less predictability for the long run. If location is very important, for example, if you have a retail store or restaurant, you may want to opt for a longer lease. You can always attempt to renegotiate lower rents or improvements as time goes on. If you have a month-to-month lease, you’ll want to make sure the landlord has to give you as much time as possible when terminating the lease.
    • Who’s responsible for paying for utilities, such as phone, electricity and water. Utilities could be included in your rent, or you may have to pay the service provider separately.
    • Whether you’ll be responsible for paying any of the landlord’s costs in maintaining the building, property taxes and insurance premiums, and if so, how much you’ll have to pay.
    • The amount of any required deposit, and whether you can use a letter of credit instead of cash.
    • A description of the space you’re renting, square footage, available parking and other amenities, like a common reception area or elevator, and whether you can spread to unused areas of the property if you need to expand.
    • A detailed listing of any improvements the landlord will make to the space before you move in. Your landlord may be more willing to make lots of expensive improvements if you’re signing a longer lease.
    • Any statements made to you by the landlord or leasing agent, such as amount of foot traffic, average utility costs, compliance with the Americans With Disabilities Act (ADA), which requires that buildings open to the public be handicap-accessible, and restrictions on the landlord renting to competitors, such as in a shopping mall, which is commonly called a “non-compete clause.”
    • Assurances that the space is zoned sufficiently for your type of business. You’ll also want to check out this information with local zoning authorities.
    • Whether you’ll be able to sublease, that is, rent the space to someone else who will pay you rent, or assign it, that is, another person steps into your shoes and pays rent to the landlord. You’ll want to negotiate the ability to sublease or assign so that, if you need to, you can move to another space quickly and without two rent obligations.
    • How and when either you or the landlord can terminate the lease and the consequences, such as forfeiture of any deposit paid.
    • Whether any dispute between you and the landlord can go to mediation or arbitration, which could benefit you because these methods of dispute resolution are less formal, less expensive, and much quicker than going to court.
    • Whether the lease and zoning laws allow you to erect a sign for your business that’s visible to the public, maybe on the building or in front of the property.
    • Whether “build-outs” are allowed, which are improvements, modifications, or additions made to the property at your request and to your specifications, and who has to pay for them.

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    When it comes time to renegotiate your commercial lease, you’ll want to back-up your reasons for a lower rent, more space or improvements with hard facts such as lower foot traffic than represented, a downturn in your industry and decreased rent in the neighborhood. Some landlords will even be willing to take a percentage of your sales instead of a flat rental fee when economic times are slow.

    As a tenant, you have far more leeway when negotiating a commercial lease than with a residential lease, which is one reason why having a lawyer to represent you in negotiations is so important. A lawyer can also research zoning laws and local ordinances and fill you in on local real estate market conditions and customs.

    Questions for Your Attorney

    • Do I have to wait for my lease to expire if I want to renegotiate the amount of rent?
    • Can anything happen to me or my business if my landlord fails to pay property taxes?
    • My landlord said he got a zoning change or variance that permitted my kind of business on his property, and I signed a lease. I just found out he never got the variance. What can I do?

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