What Should a Tenant Look for in a Commercial Lease?

Filed under: Real Estate Law

A new space for your business means new opportunities for growth and success. Of course, there is another side to that coin. Signing a commercial lease also creates financial and legal obligations which may not be acceptable to you, so careful review and understanding of your lease are vitally important.

We recommend that you review any prospective commercial lease with a real estate attorney before signing. Having said that, here are just nine of the many components of the lease to examine, before even considering an agreement.

Names are correct. Names of all parties should be listed correctly on the lease, with your business named as the tenant (rather than you personally).

The term (length) of the lease. This section will outline the length of time your business can occupy the unit and the length of time you will owe rent.

Rent and fees. The amount of your monthly rent should be straightforward, but fees can trip you up. Make sure you understand all fees associated with the lease which can include monthly operating expenses, property management fees, taxes, promotional fees, and percentage rental to name a few.

Security Deposits and Personal Guaranty. Nearly all leases require a security deposit, but the terms can vary. If you are a new business, the landlord may require a personal guaranty in addition to a security deposit.

Holdover Rent. Most commercial leases have a built-in holdover rent in the event that the tenant does not vacate the premises when it expires. While the landlord may allow you to remain in possession after the lease expiration, unless you have a written agreement extending the lease, you may be responsible for holdover rent. This ranges from 125% to 200% of the base rent paid in the month immediately preceding the expiration date.
In addition, if a tenant remains in possession after the expiration of the lease, the lease becomes a month-to-month lease and can typically be terminated by a thirty day written notice.

Terms of utilities. The lease will outline responsibilities of both tenant and landlord, regarding utilities such as Internet, electricity, gas, water, and trash service. While the base rent may be within your budget, make sure that you are adding in all the extra expenses set out in the lease so you have the full picture of what your monthly expenses will be.

Maintenance. Make sure that the lease fully explains who is responsible for repairs and monthly upkeep of the leased space and any surrounding exterior areas. Are there rules regarding cleaning or other responsibilities such as capital improvements? This section should outline these requirements in detail.

Restrictions. Some leases will restrict the type of business you can run from the location, typically found in the Use provision. Ensure that your future plans for the business won’t contradict these limitations.

Insurance. Your landlord might provide a limited amount of insurance for your inventory or business equipment, but in most cases you will be required to obtain your own. This section of the lease will outline your rights and responsibilities. Check with your insurance company to make sure that the insurance you have on your business complies with the requirements set out in the lease.

Assuming you reach agreement with these basic components of a commercial lease, you should now proceed to consultation with a real estate attorney. Many more complicated leasing provisions exist, based upon state and local laws. You should negotiate terms before the final lease is sent to you for execution in order to assure that the final lease is acceptable to you. Be sure to investigate them with legal counsel before you enter a legally binding agreement.

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