Commercial leases are different than residential leases and this article will explain the basics of commercial leases and what you should look for when obtaining one for your business.
Basic Lease ProvisionsThe terms of most commercial leases will typically be for a year or more. The average lease terms can last from 1 to 10 years long but have been known to be for durations lasting up to 99 years. Best practices dictate that any lease should be in writing but this is especially the case for those that are for more than one year - the statute of frauds could apply. Commercial lease contracts try to make sure that all characteristics of the relationship between landlord and tenant are covered by the agreement. A commercial lease should stipulate what the rights and obligations are for each party and the provisions will try to spell out every detail.
An enforceable commercial lease should contain the following provisions or items:
- names all landlords and tenants
- description of the premises being leased
- street address and building name or number
- list of common areas (hallways, lobbies, elevators and parking areas, etc.)
- the price to maintain common areas
- lease payment amounts and a schedule of any increases
- when and how the payments are to be paid (e.g., check or money order)
- any charges for late payments
- duration - the length, or "term," of the lease
- amount of the security deposit and how it is to be returned
- how utilities are to be paid including when there are multiple tenants
- who pays property insurance
- how and when the lease can be terminated
- whether there is an automatic renewal of the least upon its expiration
- what the tenant is required to fix or maintain
- the exact purpose for which the property is to be used
Prohibited ProvisionsThere are several items that commercial and residential leases cannot contain:
- Disallow or otherwise discriminate or bar someone from the lease because of discrimination of any kind.
- Eliminate or diminish the landlord obligation to comply with the American with Disabilities Act. Commercial landlords must make the premises accessible to all people, regardless of a disability.
- Give the landlord rights above what state laws allow when it comes to entering the premises of the tenant without his or her permission.
Common Commercial LeasesThere are several different types of commercial leases and a specific type may apply to dependent upon the kind of commercial space or location being leased. For example, commercial property in the center of town will not have the same type of lease provisions as commercial property in a suburban area. By their nature, commercial leases can fall and are usually placed under the categories of spaces: (i) retail, (ii) office, (iii) warehouse, (iv) ground and (v) mixed use leases. Other sub headings and typical special requirements are listed below:
Gross lease– a tenant will be responsible for paying taxes and insurance on the property.
Net lease– tenant will pay base rent and a percentage of maintenance fees, insurance premiums and other related expenses.
Triple-net-lease– used for leasing freestanding building, tenant pays fees and other expenses.
Shopping Center Lease– base rent is paid on square footage. Tenant can be assessed a portion of the property tax and can be required to pay a percentage of gross sales.
Land Lease– tenant leases bare land and builds on the property. Improvements go to the owner when the lease is over.
Advantages of Commercial LeaseBusinesses that do not have enough capital to purchase land and buildings will resort to commercial leasing but it can have advantages. Leasing property can allow the business to grow at a faster speed than when the owner has to come up with sufficient funds to mortgage a property. Commercial leasing also allows more new businesses to start up more quickly, which in turn provides employment for more residents and helps local communities prosper. This may, in turn, result in these residents spending money with the business in the role of a customer. A commercial lease may also be the only way a business can have the location they desire, since property in that area may not be available for sale. Commercial lease payments can be written off as a business expense when doing taxes.
Disadvantages of Commercial LeasesIf the lease is a net lease, the tenant must bear the costs of maintenance. If the business fails, terminating the lease may be difficult before the end of the term and there will be the need to consult a commercial real estate attorney for legal advice. Where a business is very successful, the lease payments might be raised to higher levels when it is time to renew. This may give an advantage to the landlord to raise the lease payments.
Differences between Commercial and Residential LeasesCommercial tenants are usually required to pay expenses that a residential tenant does not have to pay. The duration of commercial leases are frequently for longer periods of time too - most residential leases are only up to 2 years long. Laws are different for both residential and commercial leasing and can vary from state to state. In general, the law in the United States is that tenants of a residential lease should be given more protection than those of a commercial lease - the government does not want to see a person ejected from their home without good cause.
More differences include commercial leases not usually being subject to consumer protection laws. Landlords do not have a maximum security deposit cap and there are no rules to protect the privacy of the tenant. There are also no standard forms that are required to be used by the landlord. This adds a burden to the tenant to carefully examine the lease agreement. If you are not sure of all the implications in the lease, have a real estate attorney give you advice after a proper review of your lease.
Breaking or changing a commercial lease is much more difficult than a residential lease, primarily because of the lengthy terms of commercial leases. This makes it necessary that you are very careful to understand all the term, conditions and consequence before signing any commercial lease. There may also be the need for lengthy negotiations between the landlord and prospective tenant on a commercial lease. The intended business may have special needs or want to have special features included in the lease so close attention to details involved is important.
Written Leases are EssentialBefore signing any lease, whether commercial or residential, both a landlord and tenant are best served by having the lease in writing. This protects both parties as it allows each to review the terms, remove or add clauses that may be necessary, and is a document that can prevent disputes later about the agreed upon terms. Given the longer and more complicated nature of commercial leases, it is highly advisable that any business owner have their commercial lease reviewed by an experienced real estate attorney.
- Landlord Tenant Law:
- Leases - Commercial
Leases: Commercial Understanding Commercial Lease Terms, Provisions & Riders
By Michael M. Wechsler |
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