Common Commercial Real Estate Lease Clauses
A commercial lease is one of the most important and ambitious agreements a company can make.
The rent of a business is a huge factor in the delineation of profitability and failure, and a commercial lease often goes if 10 years or more. Because commercial leases are often not subject to mid-term termination - even if the business stops, it's an important financial commitment that could easily last longer than the business itself. Although, commercial leases may, in certain circumstances, be terminated in bankruptcy, like a standard bank loan for property investment.
For this reason, a lessee should carefully review before signing his commercial lease -
and ensure they read all the fine print and understand all the industry language.
The most common and essential clauses you will find in a commercial property lease, and what they mean:
Term - the length of the lease and specifies when the clauses are applicable. The termination clause may also indicate whether the lessee is still responsible for the lease if the business shuts down. Two people examine signature documents on the desk.
Description of the places - the exact space that the lessee rents. The accommodation description clause can be very important as some tenant costs (discussed in more detail below) are based on the exact amount of space occupied by the lessee.
Rent Escalation - a standard business lease will include a rent escalator clause that sets out when and how much your rent can increase. For example, it can indicate that your rent can increase when and if the homeowner's operating costs increase, it may establish a specific annual or semi-annual schedule for defined rent increases, or it may link rent increases to an inflationary index such as the CPI. (Consumer Price Index is a monthly measure of the average change over time in the prices paid by consumers for a market basket of consumer goods and services.)
Rent Incentives or Reimbursements - many homeowners will attract tenants to their properties by providing incentives like free or reduced rent, sometimes in exchange for home improvements. Tenants should take a close look at their rent incentive clause to understand what conditions they must abide by to claim their incentives and how many they are.
Revenue-Based Rent - a very common clause in retail leases is income-based rent, also referred to as rollover or percentage rent. It's where a tenant's rent is a percentage of his gross sales. This section often gives the landlord the explicit right to examine the tenant's books to ensure that he pays the proper rent. Somebody in a flannel shirt is chatting at a meeting with a laptop.
Operating Expenses - many commercial tenants are required to pay a portion of the cost of running the property - things like housekeeping, property taxes, landscaping, security, accountancy, insurance, etc. This share is usually based on the percentage of the building's surface area that the tenant leases. For example, if the tenant has 15% of the total area of the property, the tenant will pay 15% of the building's operating expenses. This clause is generally negotiated between the renter and the landlord, since each party may have a different understanding of what should be included in operating expenses.
Audit Rights - Rent and operating expenses based on income depend on the maintenance of accurate records to ensure that each party pays no more or less than it should. In case of disagreement, a clause on audit rights gives each party the right to examine the other party's accounts to ensure that they are not overbilled. This section will generally define the time that each party should devote to this task, respond to a request from the other party, the time it must complete the audit, and who bears the costs of the audit.
Subleasing - clause grants the lessee the right to sublet his space (or part of his space) to another lessee. Although landlords can object to a sublet clause since it forces them to give up a certain amount of control over their space, the possibility of subletting protects the lessee in case of contraction or closure of his company.
Use and Exclusive Use – a usage clause sets out the rules for how renters may or may not use the space. The usage clause may limit the hours of operation, types or quantities of commercial signs that may be displayed, and even what type of companies are allowed or forbidden in space. Always look at the use of a commercial lease clause, as non-compliance with its terms can have serious consequences. Although the usage clause protects the owner, the exclusive usage clause protects the lessee from competitors. The exclusive usage clause prevents your owner from placing a company in the same industry on the property.
Improvements and Alterations - the clause on improvements will specify the improvements and personalization that the owner must make before occupying the space. This article is particularly important for companies that have special requirements for things such as electricity or Internet access. The improvement provision clarifies what improvements are required and how these costs are apportioned between the tenant and the landlord. It also assists the owner in maintaining accurate records of the property's characteristics and value if they would like to sell it or use it to purchase an asset-based loan. The amendment clause specifies the tenant's right to amend the space. This clause may also specify a process to obtain owner approval for changes.
Casualty, Damage, and Destruction - this section looks at what happens in the event of damage caused by a natural disaster such as a fire, flood, or earthquake. The indemnification clause will specify whether the lessee (or lessor) can cancel the lease in the event of a natural disaster and whether the landlord must rebuild within a certain timeframe. It may also link any remedies the tenant may have with the amount of property damage, i.e., if the property is destroyed, the lessee is relieved of all financial liability. On the other hand, if it is only slightly damaged, its financial liability is reduced proportionately.
Insurance - this clause will specify the type of insurance that the lessee is required to purchase, such as leasing, interruption of the lease, or property, and liability insurance.
Renewal - this section explains how the lessee proceeds with the renewal of the lease. The renewal clause often provides timelines and dates for the lessee who notifies the landlord of his intention to renew the lease or vacate the property.