A lease agreement plays a crucial role in leasing commercial real estate (CRE). It outlines the terms and conditions that govern the lease during the occupancy period. Business owners and tenants have the opportunity to negotiate various provisions, allowing them to customize the agreement to meet their specific needs. Because a lease agreement is a legal document that affects the finances and responsibilities of both parties, tenants should enlist the help of a commercial real estate broker or lawyer. This ensures that the provisions are fair and justified.
As a tenant, make sure the following essential provisions are included in your lease agreement:
Rent
Rent represents the tenant’s obligation to pay the agreed-upon amount at specified intervals, such as monthly or annually. The rental rate, whether it’s full-service (FS), modified gross (MG), or Triple Net (NNN), can be negotiated based on factors like the lease term, tenant strength, required tenant improvements, and demand for the space. Most lease agreements include annual increases, causing the rental rate to rise each year according to the lease terms.
As a tenant, pay attention to how rental obligations might affect your overall costs over time. Increases often result from the base-year concept in full-service and modified gross leases. Rent can rise when operating expenses increase each year after the initial lease signing. While this increase typically ranges between 1% and 2%, being aware of it can help you avoid surprises.
Commercial Lease incentives may also impact the lease rate. If your landlord offers such incentives, make sure they are clearly stated in the lease agreement.
Repairs, Maintenance, and Improvement Clause
Understanding Improvement Responsibilities
This clause specifies the improvements made to the property before you take possession and identifies who is responsible for payment. This aspect of the agreement is critical because it involves financial obligations. Always review this clause to ensure you’re in a fair position within the agreement.
Planning Future Renovations
Additionally, this clause outlines the improvements you are allowed to make to the CRE property. If you plan to renovate the space to suit your business needs, this clause becomes especially important. If an improvement clause is absent and you wish to make changes, negotiate to include one or request permission from your landlord or property manager.
Sublease Clause
Taking risks is a part of running a business. As a business owner, you must prepare for potential failures and losses, just as you prepare for success. Having a backup plan is crucial, and a sublease clause can protect you from financial difficulties.
This clause determines whether you, as the existing tenant, can sublease the space to another tenant. It can shield you from paying rent for unused areas or from terminating your lease if you need to relocate or cease operations.
However, not all lease agreements include a sublease clause. Consider your long-term needs and future plans. Landlords often hesitate to include this clause, but you can negotiate its inclusion to protect your business and finances.
Permitted Use
Understanding Allowed Activities
As a tenant, you must know the allowable or permitted uses of the CRE property. Permitted use refers to the activities that are allowed on the property, as described in the lease agreement, CC&Rs, or zoning requirements. Verify with your city whether your business use is permitted at the location you wish to lease.
Dealing with Restrictions
For example, a dog grooming business might not be allowed under the CC&Rs, while a welding company might require specific zoning. Confirm these details before signing a lease agreement, as property restrictions could be a deal-breaker if they limit your business activities. However, you can negotiate to broaden the permitted use provision in your lease agreement.
Renewal Clause
Forgetting to renew a lease contract can lead to serious consequences, such as eviction. A renewal clause can prevent this from happening. This clause gives tenants the right to renew or extend the lease agreement. However, the specifics of this clause can vary from one contract to another.
A renewal clause should outline the steps required for a tenant to renew the lease when the term ends. In some cases, tenants might need to notify the landlord of their intent to renew. When negotiating the renewal clause, aim for methods that are convenient for both parties, ensuring that neither the tenant nor the landlord faces unnecessary inconveniences.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
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