“Important Things To Know About A Commercial Lease Agreement” written by Mike Marko.
The commercial lease agreement is important to both the property manager and the tenant.
All kinds of rental business use a rental or lease agreement. Even in commercial properties, the property manager provides a lease agreement to their tenant.
Before you let your tenant use the rented property, it’s important to have them sign a commercial lease agreement first. The agreement states the expectations and use of the property for you as the property manager and also for your tenant.
That’s why today we’ll be talking about the commercial lease agreement, and about its importance to the property manager and the tenant.
Understanding What Is A Commercial Lease Agreement
The commercial lease agreement is the legal document that determines and details all the responsibilities and terms for all parties to the commercial rental. Understanding a commercial lease agreement is a key requirement of being a commercial property manager.
Because the commercial lease agreement is a legal document, it is important to first understand what a commercial lease agreement does and can do when overseeing a commercial property rental…
What Is A Commercial Lease Agreement
A commercial lease agreement is also referred to by other names such as:
- Business Lease
- Industrial Lease
- Office Space Agreement
- Standard Commercial Lease
- Commercial Rental Contract
This is an agreement or contract between the landlord and the tenant that governs and details the terms and responsibilities of tenants and landlords during a rental of a commercial space by a commercial business tenant. Since it is a legally binding contract, the commercial lease agreement is usually negotiated and given for approval before the actual date the tenancy begins.
Once the property manager and the tenant sign the commercial lease agreement or contract, it automatically means that the property gives or grants a tenant the right to use the rented property for a specific period of time. Signing the contract also means that both parties have agreed on every clause and responsibility detailed in the terms of the agreement and anything else that is written in the contract.
A commercial lease agreement, by name details and automatically assumes that the rented property will be used for commercial business purposes and not for residential living. This means that the rented property could be turned into an business office or if the tenant rented the entire building, it could be turned into an independent retail store, a new restaurant, or even a large warehouse.
To protect the commercial property, you should include the requirement that the commercial tenant has and gives you a copy of their commercial business license to meet this requirement.
Uses And When To Use A Commercial Lease Agreement
As one of your duties, you should know the proper uses and when to use a commercial lease agreement. The agreement should inform both parties about the clauses of renting the property and include everything that the property manager and the tenant have agreed before the start of the tenancy.
Most property managers use the commercial lease agreement to clarify the tenant’s concerns and notify them about the restricted activities inside the property.
A commercial lease agreement is only used if the property is rented for commercial purposes. Other than that, here are the following instances where you could use a commercial lease agreement:
- If the property manager owns an office building and wish to rent work space to other businesses and individuals
- If the property manager owns a warehouse or industrial space that you would like to lease to another business
- If the property manager is leasing commercial space such as:
- Accounting Firm
- Business Office
- Child Care Facility
- Hotels or Guesthouses
- Legal Office
- Medical Clinic or Health Care Facility
- Startup Company
- Self-Storage Facility
- Shopping Mall Store
- Trade Businesses
Disadvantages Of Not Creating A Commercial Lease Agreement
Like most kinds of rental or lease agreements, a commercial lease agreement must be written in order to protect the rental property and yourself from any kind of lawsuits.
Unwritten agreements invite a lot of problems not only for you but also on your tenant.
Below, we will detail the main disadvantages of not creating a commercial lease agreement.
Disadvantages To The Landlord
Renting a commercial property without signing of a commercial lease agreement can make even the most basic jobs like collecting rents difficult. When dealing with a verbal or unwritten agreement, you as a property manager might expect to experience the following:
- Unpaid or late rent
- Difficulties in finding a better tenant
- Hassles of paying tenant’s utility bills
Not having a written lease agreement does not easily detail the responsibilities of the tenant and landlord when it comes to maintenance and repair of the building. Lack of a written agreement could cause the building to experience unexpected repairs, damages, and unnecessary repair to the rented property.
When using an unwritten agreement for the commercial rental, it could also lead to expensive lawyer fees when:
- Evicting a tenant
- seeking remedies for unlawful use of the premises
- cleaning up hazardous materials
- removing unpermitted liens on the property
For worst case scenarios, unwritten agreements could bring problems because of:
- Illegal business activities taking place on the property
- Responding to complaints from neighboring tenants
- Not being a “named insured” of tenant’s insurance policy
Disadvantages To The Tenant
Since an unwritten agreement would be enforced by the courts, there is no way to confirm negotiated rents and security deposits and other basic tenant needs. Your tenant could lose money because of the following reasons…
- Their security deposit is not returned
- They have damaged or bad credit
- Unable to find a new office
- Unexpected shared costs
The tenant could also suffer from unclear maintenance obligations. Depending on the oral agreement of who is responsible for maintenance, there could be disagreements as to who is responsible. This could cause tenants the possibilities of losing their business because their working facility is not maintained.
Here are other problems that could affect the tenant’s business
- Unsecured premises
- Poor security of entryways
- Other tenants’ businesses
- Landlord’s failure to repair
- Improper janitorial services
- Burst pipes during the winter
Other issues that could negatively affect the tenant by not having a written lease agreement could be stress because of the following.
- Being unexpectedly evicted
- Not placing an advertising sign of your choice outside
- Unfair competition from other businesses despite promises to be the exclusive store
Basic Elements Found In A Commercial Lease Agreement
Before you start writing your commercial lease agreement, let’s first take a look at the basic elements that are found in the said agreement.
Most rental or lease agreement contains the names of the property manager and their tenant. The name of the landlord, the property manager, or the lessor is listed before or after the name of the tenant.
The lessor is the party who is renting the commercial property or building to a tenant.
The name of the tenant is also listed in every rental or lease agreement.
The tenant is also known as the lessee and they are the party who is operating a business and the one who will pay for the rented property.
The lessee is the party who is renting the commercial property for business uses.
The term of the tenancy is always present and needs to be negotiated and established prior to signing of the contract, especially when agreeing to a commercial lease agreement.
Important information about the tenancy is written in the terms of the commercial lease agreement or contract. Terms include the number of years or months the physical space will be needed along with the start and end date of the lease. Additional terms can be set to detail and separate responsibilities of maintenance and repairs for the building and other responsibilities during the rental period.
The property manager should specify the terms and state if an automatic renewal is applicable when the lease is ended.
This part is important in every commercial lease agreement because the demised premise details and states the size of the space that’s being rented out by the commercial tenant.
In some cases, the commercial lease agreement comes with a property map with details about the size and whether the tenant has access to services like:
- Snow removal/landscaping
- Heating/air conditioning
A commercial lease agreement contains details about the whole property. This will inform the tenant about the shared common areas that will be used by other tenants such as walkways and parking lots.
Just like any kind of rental or lease agreement, a commercial lease agreement contains the starting cost of leasing the space and specifies if the rent will be paid on a monthly or annual basis.
It is only logical to include the cost of operating the entire building and maintaining common spaces. Including this information to your commercial lease agreement is useful especially if your tenant’s responsibility covers the paying of utilities or maintenance of the property.
Make sure you include real property taxes, utilities, and collective advertising costs as well.
Never forget to include details about your tenant’s security deposit. This includes how their security deposit will be used after they vacate the commercial rental space. It is important to detail uses of the security deposit for basic repairs, replacement of flooring or carpets as well as to repair any significant damage to the rented property.
Ensure that you are familiar with local laws and that your lease does not contradict what is actually allowed when applying and using a security deposit.
Property Use And Occupancy Details
You also need to ensure that there are no illegal activities being conducted by businesses inside the rented property. To do this, it is important to include the specific activities that are not allowed in the rented space and common areas.
Restricted activities may include details on smoking, after-hours noise, and dumping of garbage.
In case where the tenant is planning to open a restaurant or other businesses that requires improvements or construction, it’s important to specify how much changes they are allowed to make to the rented property.
You need to clearly specify who will be responsible for paying and overseeing the construction project. Additionally, you should detail who is responsible for returning the rental property back to its original state when the commercial tenant lease expires or the property is vacated.
Final Thoughts On What Is A Commercial Lease Agreement
In this blog post, we have discussed the important details you will need for your commercial lease agreement. It’s very important to understand these details before renting out a property. It can save you a lot of problems in the future.
A commercial lease agreement contains all of the useful information about the tenant and their tenancy. This document is important to both the lessor and the lease. That’s the reason why it is usually in written form, and contains all the common (and essential) elements needed in a lease agreement.
We have also discussed how an unwritten agreement could be disadvantageous to both of you and your tenants. Because having no written agreement will have no reference to what was agreed upon by both parties before the property is rented. It would also be difficult to distinguish who should be responsible for specific duties since there is no reference to look at.
If you have questions regarding a commercial lease agreement, you can enter them on the comments section below.
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