Negotiating a commercial real estate lease is often one of the most critical aspects of starting or operating a business. Knowing what goes into a commercial lease and how to negotiate favorable terms can help your business achieve operational success.
Types of Commercial Real Estate Lease
Businesses may lease commercial space under various types of lease agreements. Some of the most common types of commercial leases include:
- Gross lease: Under a gross lease, a commercial tenant pays a fixed rent in exchange for leasing the space and having the landlord cover all operating expenses for the space, including utilities, maintenance/janitorial services, taxes, and insurance (which may not cover the tenant’s personal property).
- Net lease: Under a net lease, a commercial tenant assumes some or most of the property’s expenses, such as property taxes, maintenance, utilities, or insurance. Parties may sign a single net lease, under which the tenant pays rent and one expense (like property taxes), a double net lease, under which the tenant pays rent and two categories of expenses, or a triple net lease, under which the tenant pays all property expenses on top of rent.
- Percentage lease: Commercial tenants in the retail sector who lease space in malls or shopping centers may negotiate a percentage lease, agreeing to pay a lower base rent plus a percentage of sales revenue. Percentage leases create a shared incentive between the tenant and landlord to drive customer traffic to the tenant’s location.
Key Terms in Commercial Real Estate Leases
Although parties may negotiate various terms in a commercial lease, agreements usually contain several standard terms, such as:
- The lease term/duration, including options for renewing the lease
- Termination provisions under which either party may end the lease before the expiration of the term
- Rent structure, including provisions for escalating rent or automatic rent increases
- Operating expenses passed onto the tenant, such as common area fees
- Tenant improvements, including authorized improvements/renovations the tenant may make in the property or financial incentives provided by the landlord to fund buildout/renovation of the space
- Exclusivity clauses that prohibit landlords from renting to other tenants that compete in the same industry/sector
Negotiating a Commercial Real Estate Lease
Obtaining leased space for your business may involve intensive, complex legal negotiations with prospective landlords. Here are some critical considerations to keep in mind when negotiating a commercial lease:
- Thoroughly understand the lease terms before signing: Commercial leases may become long, complex legal documents; a single clause buried in the document may become a critical point of contention should a dispute arise. Understanding a lease’s terms can help your business avoid surprises.
- Address common negotiation points: Your lease negotiations should address critical provisions of commercial leases, such as rent/rent increases, lease duration, renewal rights, maintenance/repair responsibilities, and early termination rights.
- Obtain favorable lease terms: Working with legal counsel experienced in negotiating commercial leases can help businesses obtain favorable lease terms, such as improvement allowances or occupancy requirements that allow retail businesses to exit early from a dying mall or shopping center.
Legal Considerations in Commercial Leases
Common legal issues that may arise when drafting commercial lease agreements include:
- Zoning laws and building codes: Commercial tenants should ensure they can legally use the leased space for their planned purposes under applicable zoning and building codes.
- Default and remedies: Businesses must understand the financial and legal consequences of a default under the lease and what remedies they or the landlord may have for a default.
- Subletting and assignment: Tenants may negotiate specific rights to sublease a portion of their space to another party or to assign the lease to another business if the tenant no longer needs the space.
Contact a Business Attorney Today
Before you negotiate a lease for commercial space for your business, talk to an experienced business attorney with Jones Gregg Creehan & Gerace. We can help you understand commercial real estate leases and the potential challenges and obstacles your company may face when leasing commercial real estate. Contact us today for an initial consultation with a business law attorney to discuss your legal rights and options.