Commercial Lease Provisions For Commercial Tenants
A crucial part in leasing commercial real estate (CRE) is the lease agreement, These agreements sum up all the terms and conditions that will govern the lease within the period of occupancy.
Business owners and tenants can negotiate a number of provisions. This allows the landlord and the tenant to customize the provisions according to their needs. Since a lease agreement is a legal document that determines the finances and the duties of both tenant and landlord, a tenant is recommended to always employ the help of a commercial real estate broker or lawyers in reading through the document to ensure that provisions are fair and justified.
From your end, as a tenant, here are the provisions that must be present in your lease agreement.
Commercial Lease Provisions
RENT
A rental rate is the obligation of the tenant to fill at the agreed number of days or months. Regardless of the lease type (full-service (FS), modified gross (MG). or Triple Net (NNN)), the rental or lease rate can be negotiated, depending on the length of the term, strength of the tenant, the amount of tenant improvements needed and demand for the space. Most lease agreements include annual increases, causing the rental rate to go up each year, depending on the lease agreement.
For instance, as a tenant, you should be wary of how your rental obligations may affect your overall rental amounts over time. This primarily happens due to what’s called a base-year in both full-service and modified gross leases. This unexpected increase in the rental amount is the difference from what the operating expenses were when you first signed the lease to where they end up each year after the accounts have been reconciled. Typically, this increase is no more than 1% or 2%, but it’s worth noting so there are no surprises.
Lease incentives can also affect the lease rate, and if this is offered by your landlord, you must ensure it is stated in the lease agreement.
REPAIRS, MAINTENANCE, AND IMPROVEMENT CLAUSE
This part of the agreement explains the improvements made in the property before you take possession of the space, along with the terms identifying who is required to pay for the improvements made. For this reason, this clause is a crucial entry-level consideration as this involves money. Always check for this clause in your agreement to make sure that you are in a fair position within the agreement.
Additionally, this clause in the agreement covers the improvements you are allowed to make in the CRE property. This is significant if you wish to do some renovations in the space to cater to the type of business that you have.
If there is no improvement clause and you wish to renovate your space, you can negotiate to include one or write a letter to your landlord or the property manager asking for permission.
In leasing commercial real estate properties, you must always understand the nature of your lease agreement. More importantly, and we cannot stress this enough, you must always read the terms in the agreement before signing. If you deem some terms in the agreement unfavorable, never hesitate to negotiate. As a tenant, it is your prerogative to do so in the appropriate means, and as an entrepreneur, it is a crucial step that can determine the success of your business venture.
SUBLEASE CLAUSE
Entering the world of business means you are ready to take risks. As a business owner, you should be ready to encounter failures and losses just as you are ready for success. In case of troubling times, one should be ready for a back-up plan. A sublease clause can protect you from bankruptcy and debt.
The sublease clause in your lease agreement must be reviewed. It is stated in that clause, whether or not, you – the existing tenant, can sublease the space to another tenant. This clause will be able to protect you from having to continue to pay rent for unused areas of your property or from having to terminate your lease in case you want to relocate your business or entirely stop operations.
However, not all lease agreement has a sublease clause. That is why it is important for you to consider your long term need and future plans. Landlords, typically, have certain pessimism on this clause in leasing agreements. However, you can always negotiate for a sublease clause to be included to also secure your business and finances.
PERMITTED USE
As a tenant, you should be aware of the allowable or permitted uses of the commercial real estate you are eyeing. Permitted use means the enumerated activities allowed in the property. These activities are usually described in the terms of the lease agreement, the CC&R’s, or on a larger scale the zoning requirements. Be sure to call your city and verify if your business use is allowed at the CRE project you want to lease at. A permitted use may still require permission. Take for example – a dog grooming use may not be allowed in the CC&R’s, while a welding company is required to be in a project with specific zoning.
This is something you need to check on prior to signing a lease agreement as there may be a chance that the property you are considering to lease will not allow your business use. This can be a deal-breaker, especially if the nature of your business requires a lot of activities that are limited by the landlord.
But the good thing is, as a tenant, you can always negotiate the permitted use provision of your lease agreement to be as broad as possible.
RENEWAL CLAUSE
It is always a possibility for a tenant to forget to renew the contract and might lead to consequences, such as eviction. In this case, a renewal clause can save you all the worries. A renewal clause in the lease agreement gives the tenant the right to renew and/or the right to extend the agreement, but in totality, the particulars of this clause may vary from contract to contract.
A renewal clause should be able to include the steps needed for a tenant to renew their lease agreement when their term ends. There are also instances requiring tenants to write to the landlord of the former’s intent to renew the agreement.
Nevertheless, when it comes to renewing contracts, negotiate for convenient methods for both tenants and landlords to make sure that both parties are spared from inconveniences.
This article serves to introduce you to the basic clauses that need to be included in your lease agreement. This said, you are still recommended to employ professional help as you negotiate your way to business success.
Even after outlining all the information above, dealing with commercial lease provisions can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help you achieve your leasing goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
