“Understanding The Important Clauses In A Commercial Property Lease” written by Mike Marko.
How important are all the clauses in your commercial property lease? Are they really that really important?
There are a lot of clauses in a commercial property lease… and not all clauses are treated the same. That’s why it’s important to understand the importance of each clause, and how it may or may not affect you in any given agreement.
The commercial property lease is effectively a set of rules: a set of rules you and the tenants have to adhere to. It helps to clearly define roles and responsibilities of all parties AND creates a framework in case someone doesn’t do their part.
That’s why today we’ll be covering the different important clauses that should be included in a commercial property lease. And we’ll take the time to try and understand how each clause will affect you and the tenants.
Important Clauses To Include In A Commercial Property Lease
When a new (or existing) commercial tenant is signing or renewing their commercial lease it’s important to include important clauses that can help and protect each party to the lease. Commonly a commercial lease runs for 2 to 10 years. So when negotiating terms and clause to the terms of the lease it’s important to include important clauses that should be present in every commercial property lease agreement.
Before learning some of the important clauses that every commercial lease agreement should include let’s first understand how and what a commercial lease agreement does for both the tenant and the property owner or manager…
What Is A Commercial Property Lease
A commercial property lease is a contract between a landlord and business owner which dictates terms for the tenants property rental in the owners commercial building or property. The commercial property lease contains all the terms and conditions that are needed to be followed while renting the commercial property or commercial space within a given period. The commercial lease agreement is needed by renters which are most likely commercial business owners who need to lease a property for business or other commercial purposes.
A commercial property lease is a written agreement which details all the terms and conditions the tenant and landlord will follow while the commercial tenant is renting out the property. The commercial property lease is also usually more complex than residential lease it typically has longer lease terms and commonly has incentives and discounts that are keep the rental payments tied to the tenant’s business’ profitability or other factors.
Important Clauses In A Commercial Property Lease
Commercial property lease agreements may vary in content depending on the landlord or property manager’s knowledge in writing and the needs and requirements of tenants and landlords to the commercial property lease.
It’s important that a property manager knows what he/she should include in the commercial property agreement when preparing one. Every important clause in the commercial property lease will play a vital role in managing the rental and detailing responsibilities during the commercial rental during the lease term.
One of the most crucial and most important issues that needs to be included and is often a key point of negotiation in a commercial lease is the amount of monthly rent the commercial business will pay monthly. It’s important prior to signing of the commercial lease that you and the commercial tenant to the property have a mutual understanding regarding rental amounts and any discounts that may be given or offered so that you will not face any conflicts with them.
The following terms are most commonly negotiated into commercial leases:
- Automatic Rent Increases. Since the commercial lease length is generally more than one year and can be as long as 10 to 15 years it’s important that you address and negotiate any automatic rent increases with your tenants and determine what they’re based on, when they are in effect and how much the increase should realistically be. Commonly an automatic rent increase will be the cost of living % increase yearly for the area of the commercial building.
- Tenant Improvement Deductions. It’s common for a commercial business to require that the building be updated and retrofitted to current standards for the area, yearly. You can negotiate a rent deduction or a percentage of responsibilities for payment of improvements to the building. Commonly a commercial lease will have a term or clause that will result in rental decreases if the building is improved for use by the tenant. But it is important to be clear on any discounts or what is needed for approval to receive discounts to avoid any misunderstandings with commercial tenants.
- Landlord’s operating costs. It’s important to determine the percentage or amount of operating costs for the building that the property owner will pass on to the tenant. Often the tenant is responsible for electricity for a specified % determination of the space that they occupy in the building. For instance if the occupy 50% of the building then they would be responsible for 50% of the operating costs for the building. This is important for both the tenant and landlord to negotiate into the commercial lease prior to signing.
- Unanticipated rent issues and increases. When signing the lease the rent for the commercial space is normally fixed throughout the lease term. However you can include a clause that allows you to re-negotiate rental terms after a specified period of time during the lease period. This is most commonly agreed to be a maximum percentage of increase so the tenant does not feel taken advantage of by the increase. Often a clause like this can be a deal breaker for commercial leases, so be careful in introducing or requiring increases in rents during the specified lease periods…
Description Of The Premises Clause
Before leasing out the property, it’s important that the property is properly and specifically described in the commercial property lease. You should make sure that the agreement will specify the actual space or property that will be rented to the tenant. If the property that will be rented is an entire building, you could just simply indicate the building’s address.
On the other hand, if the tenant will be renting just a part of the space, make sure that the contract was able to clearly specify that part in detail.
In addition to the description of the property, you should also indicate the “access issues” in this clause. The access issues will assure you, your tenant’s employees, and customers that they can access the rented property as well as identify any security clearances or issue the tenant must conform to in the commercial building. Certain areas that you should indicate and detail times, types, and requirements for use in this clause are the conference rooms, storage rooms and parking.
The listing of parties to the commercial lease is one of the most important clauses to include in every commercial lease agreement. It is important to indicate the names of both parties that are involved in the commercial property lease. This will be you as the landlord or lessor, and the tenants, as the lessee.
Since the commercial lease agreement is a legally binding contract the key to remember in writing this clause is to write the correct business names of all the parties that are involved in the agreement. Having the business licence or corporate documents from the tenant will allow you to legally bind the commercial business to the terms and conditions of the commercial lease agreement.
Using the business name of the individuals that are involved in the agreement will protect these individuals from having liability. As a landlord or property manager, you should remember to use your business name when listing your name in this clause. Additionally, it is important to list all tenants and companies to the lease agreement for extra security if the tenant faults or tries to break the lease you have legal standing in holding each tenant responsible for completion of the commercial lease…
The term clause specifies when will the lease start and when will the lease end. Most commercial leases terms run from 1 year to 10 years. a 5 year or 10 year term is common to secure commercial space in a commercial building. Most lease terms begin the moment the tenant signed the agreement. Even if that’s the case, you can negotiate or allow the tenant not to pay rent until he/she moves in.
Other important terms to consider is requiring the commercial business to keep up to date insurance for their business to help avoid any lease breaks or unanticipated losses if the building is damaged by the tenant. It is common to require copies of insurance certificates and it is important to detail the amounts of insurance required and proof of insurance in the terms of the lease agreement,
When negotiating terms for rent and insurance requirements you should be aware that this is costly among new businesses so it is important to determine time and due dates prior to finalizing and signing the commercial lease with the tenants. When writing the terms it is best approach these clauses by providing start dates, dates insurance certificates are required, and other various obligations under the lease such as:
- When to move in
- When rent is first due
- When the tenant need to have insurance
- Proof of Insurance required and time frame to provide Certificates of Insurance
Use And Exclusives Clause
This clause helps you regulate how the tenants should and should not use the rented property. This clause specifies how a tenant can and can’t use the property that they’re renting. You can be detailed or specific or very broad in writing this clause.
You can include the following examples for this clause:
- Restrict the type of business that the tenant can conduct, which may preclude them from expanding their business into new areas
- Restrict the manner and style of any signs or advertising on the premises
- Spells out uses of common space uses within in the building if other commercial tenants are occupying the building
- Can give exclusive uses to parking areas, storage rooms, and other areas within the commercial property or building
On the other hand, the exclusive clause states that the tenant alone can do something in the rented property and that the other tenants cannot do that. This clause is usually used to make sure that competitors of the tenants can’t move in next door. An exclusive clause of one tenant becomes a use clause for another tenant.
Improvement And Alterations Clause
This clause is about who is permitted to make improvements and alterations, and more importantly who will pay for the improvement. This clause can be very important. There could be issues about the design, aesthetics, and what is “appropriate” that needs to be settled between all parties involved.
The clause should be very specific with regards to what improvements or alterations need prior written consent, and what can be done prior to your knowledge.
This clause will also cover who should pay for any changes made in the rented property and how those changes will affect the rent. And don’t forget to spell out who is responsible for changing the property back after the tenant is done with the property.
This clause is an important issue that needs to be included in every commercial property lease. It spells out who would be responsible in maintaining the property. It also is specific in the responsibilities that are bound to all the parties involved in the lease.
This clause should tackle the initial issues like what bills should be paid and who is obligated to pay for them. A maintenance clause should also discuss the following concerns:
- Who should be responsible when problems occur
- How should the parties resolve any maintenance issues
- How maintenance issues will affect the rent
If you are going to require the tenants to keep the building “up to code,” you should be specific in indicating what codes you are referring to.
Aside from the other important clauses that we have already discussed, you should also consider including the following commercial lease terms:
- Parking, signs and access issues;
- Security arrangements;
- Option to renew the lease;
- Dispute procedures;
- Attorneys fees;
Final Thoughts On What To Include In A Commercial Property Lease
In today’s blog post, we talked about what important lease terms should be considered for inclusion in a commercial property lease. As a property manager, it’s important to understand the importance and relevancy of each clause. This will help you in knowing how you can regulate the use of your commercial property. The lease will ultimately be your framework to help define the responsibilities of the property manager and the tenants..
Feel free to add your thoughts about the commercial property lease in the comment section below.
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