Leasing Commercial Property

 Leasing commercial property is an important component of any small business' success. In the lease agreement, there are restrictions, obligations, and rights regarding the use and maintenance of the property. Making sure the terms and conditions favor you is critical. You need to make sure you enter into the right type of lease agreement and that your interests and rights are properly addressed and protected.

At the Law Office of Jennifer M. Settles, we understand the complexities of commercial leasing. From finding the right property, to negotiating the lease agreement, and to finalizing it, we will be at your side, providing critical insight and legal representation. Contact us today at (602) 617-3938 to schedule a free initial consultation and learn more about leasing commercial property for your business.

Types of Commercial Leases

A commercial lease is a contract that is entered into by a commercial tenant (or “lessee”) and a landlord (or “lessor”), who is often the owner of the property. The lease outlines the duties and expectations of each party and states a date through which the lease is effective. 

There are different types of commercial leases. The following are some of the most common:

Net Leases

Net leases (sometimes called “triple net” or “NNN” leases) take a myriad of different forms, but the basic premise is that the tenant pays a certain amount in base rent and is also responsible for paying the landlord for the tenant's proportionate share of property taxes, insurance, and common-area maintenance (or “CAM”) charges.  Base rent under a net lease is generally less expensive than base rent under a full-service lease, but the overall payment amount can vary from month to month and are not fixed like the rent in a full-service lease. 

Full-Service Leases

In a full-service lease (sometimes called a "gross" lease), the tenant pays a specified amount for monthly rent, and the landlord has the responsibility of paying all expenses of the property, including repairs, maintenance, property taxes, insurance, CAMs, and utilities.    However, as with a net lease, the details of a full-service lease can vary significantly.

Percentage Lease

In a percentage lease, the landlord and the tenant work together to ensure the business is profitable, as the rent consists of a base amount (sometimes referred to as the “minimum annual guarantee” or “MAG”), plus a percentage of the gross or net income of the tenant's business. This means that the landlord has a direct interest in ensuring that the tenant's business is profitable.  Similar to net and full service leases, the devil is in the details and there can be significant variation, including the manner in which the percentage rent component is calculated.  

Six Terms Tenants Should Consider Before Leasing Commercial Property:

1. Suited to Needs. Before renting a space for your business, you need to make sure the space you are renting is suited for your needs. There are many potential considerations here.  For instance, does the property offer adequate parking? Is there enough storage?   Is the property properly zoned for your intended uses? Is the property encumbered by any private land use restrictions that would impede your use?
2. Tenant Improvement Allowance. Depending on market conditions, some leases come with a tenant improvement (or "TI") allowance, to cover the cost of needed improvements or remodeling at the commencement of your tenancy.   This should always be investigated and negotiated with the landlord and described in the lease documents. 
3. Who is Responsible for Maintenance and Repair.  It is critical for the lease to be clear on which party is responsible for maintenance and repair of the premises  throughout the lease term.   For instance, if the HVAC system, plumbing, or roof needs to be repaired or replaced, which party is responsible?   These types of items can be a significant and unplanned expense, and must be carefully negotiated and documented in the lease agreement.  
4. Insurance Coverage. Even if the landlord carries insurance, the tenant will need to carry its own insurance as well. Typically, the lease agreement will specify the precise insurance coverages that are required of the tenant.   Finding an insurance agent knowledgeable in this area will help you make sure you and your business are protected against liability and other lease-related issues. 
5. Lease Guarantor.    Is a lease guarantor required?   From the tenant's perspective, you ideally do not want to post a personal guarantee of the lease, because a personal guarantee will subject you, in your individual capacity, to financial liability for the lease.   Lease guarantees can have different scopes, and therefore must be negotiated and documented very carefully.
6. Holdover Rent.   At the end of the stated lease term, does the monthly rent payment automatically increase by a stated amount or percentage?   Such a holdover rent provision is often buried at the back-end of a lease agreement, and can be a highly unwelcomed (and costly!) surprise to an unsuspecting tenant.  Depending on market conditions, holdover rent can be negotiated before the lease is executed.   

In addition to the above, there are many other matters to consider when negotiating a lease, including what happens if either party defaults under the lease, and whether a right of first refusal (or "ROFR") is being offered. As your business attorney, the Law Office of Jennifer M. Settles will advise you accordingly on all these important topics as we draft, review, and negotiate commercial property leases on your behalf. 

Six Terms Landlords Should Consider Before Leasing Commercial Property to a Small Business:

If you are considering renting out space for a small business, there are certain matters that you should take under consideration.

1.  Type of Lease Needed.  It is best to familiarize yourself with the different types of commercial leases available to determine which works best for your situation, the building in question, and adjacent tenants, if any.  The different types of leases are discussed in this Blog post, above.  

2.  Rent Amount. It is best to research the rate being charged for rentals similar to yours in your area. The rental amount needs to be clearly stated, including base rent and any additional rent obligations.   If there is a CPI escalator, this needs to be clearly defined, as well as any other mechanism for rental rate increases throughout the lease term.

3.  Insurance: No matter the type of lease you have, your lease should always outline your obligations for the insurance coverage on the building, as well as the tenant's insurance obligations. Check with your insurance agent to make sure you cover all your bases.   The lease language should address requirements for naming the landlord as an additional insured on the tenant's policies, waiver of subrogation if applicable, and which party's insurance policy is primary and noncontributory. 

4.  Term and Auto-Renewal.   The Lease needs to clearly define the term (ie., the lease start date and end date), and whether the lease includes renewal options or automatic renewal of the term, and the applicable rental rate for any renewal terms.

5.  Indemnification.   It is appropriate for the lease to include environmental and other indemnification obligations from the tenant (and any lease guarantor), so that the landlord is protected in the event of damage or harm caused by the tenant or its employees or guests.

6.  Security Deposit.  Are you charging the tenant a security deposit?  If so, it needs to be identified in the lease, and, depending on state law, may need be segregated from the your other funds. 

There are several other matters to consider, including remedies in the event of a tenant default.  As your commercial real estate attorney, the Law Office of Jennifer M. Settles has experience in these issues and can help landlords identify, negotiate, and finalize terms to help you manage and lease your commercial property.

Elements of a Lease Agreement 

The terms used in a lease vary according to the specific type of lease and the jurisdiction in which the property is located. Even so, there are some elements that are common to all leases.  For instance:  

• All leases should address the rent amount and what is included in that amount, as well as when the rent is due, and when it may increase
• Leases should clarify the term for which they are effective, as well as how much notice each party is required to give the other if they do or do not intend to renew the lease
• Leases should also address whether or not assignments and subletting are allowed, and if so, any rules or restrictions
• Every lease should contain a thorough description of the property to prevent problems down the road in case the parties do not agree on whether or not part of the property, such as a side parking lot, is included in the lease
• Another matter to include is a permitted use clause, to clarify the ways in which the property may be used by the tenant and any specific prohibitions on use

Common Disputes Arising Out of Commercial Leases in State

Unfortunately, disputes in commercial leases are not uncommon. Some of the most common issues that lead to evictions, lease litigation or arbitration include:

• Failure by the tenant to pay rent in full when due
• Disagreement over which party is responsible for repairs and maintenance 
• Either party terminating the lease
• Eviction of a tenant that refuses to vacate the property

No matter what issues arise, it is best to seek counsel from a commercial real estate attorney who can advise you on the best way to proceed.  Contact the Law Office of Jennifer M. Settles at (602) 617-3938, or through our website at www.jsettleslaw.com,  for help in your leasing matters.  

What Can a Commercial Real Estate Attorney Do For You?

Unlike most residential leases, commercial real estate leases are not one-size-fits-all; they are very specific to the industry, the property, and the lease negotiations. For example, the rent for office space is not simply determined by the square footage (as is the case for most residential leases) but also largely based on how the property will be used, and the “class” or quality of the building. Another example involves maintenance, i.e., in residential leases, landlords remain responsible for most of the maintenance while in commercial leases, negotiations determine responsibilities. 

Some of the major benefits you will receive by retaining a commercial real estate attorney include but are not limited to:

• Obtaining commercial leases accurately aligned with the letter of intent
• Clarifying maintenance responsibilities as to things like security, parking lot maintenance, lighting, electricity, and more
• Negotiating fair and reasonable termination clauses in case the business fails and a tenant needs out of a lease sooner than anticipated 
• Drafting, redlining, reviewing leases to ensure they are not lopsided in favor of the landlord, and this includes all things related to leasing the property, like responsibilities for utilities, maintenance costs, taxes, and security deposits

The important thing to remember here is this: commercial real estate leases are often fairly negotiable, depending on market conditions and the credit of the tenant, and if negotiated correctly, this can save you time, money, and stress. The landlord may draft the initial lease agreement, but you, as the tenant,  have the right to negotiate the terms and conditions. Legal counsel representing your interests in these negotiations is your best means to a fair lease agreement, which will ultimately benefit your business.

Contact a Real Estate Attorney Today

If you have questions or concerns about a commercial lease agreement, let the Law Office of Jennifer M. Settles assist you.  Contact (602) 617-3938 or fill out our online contact form at www.jsettleslaw.com to schedule a free initial consultation and get your business started off on the right foot with a well-negotiated and favorable commercial lease.