Are you considering signing a commercial lease for your business? There are a lot of important factors to consider before committing to a lease agreement. In this article, you’ll learn what to know before signing a commercial lease, including understanding your business needs, reviewing the lease agreement, negotiating the terms, signing the lease, and managing and terminating the lease.
Following these steps will better equip you to make an informed decision about the best commercial lease for your business. So let’s dive in and explore what you need to know before signing a commercial lease.
Introduction to Commercial Leases
In this section, you’ll learn about commercial leases and their key components. You’ll also learn about the critical elements of a commercial lease agreement.
What is a Commercial Lease?
A commercial lease is a legal agreement between a landlord and a tenant in which the tenant gains the right to use a property for business purposes. This property can include a physical storefront, office space, warehouse, or commercial property. The tenant pays rent to the landlord in exchange for the property’s right to use.
Commercial leases differ from residential leases in several ways. For one, they are generally longer, often lasting for several years. They also tend to be more complex, with more detailed provisions and clauses outlining the landlord and tenant’s rights and responsibilities.
One key aspect of a commercial lease is that it is a binding legal contract, which means that both parties must adhere to the agreement’s terms, and any contract breach can result in legal consequences. It’s important to carefully review and understand the terms of a commercial lease before signing it to ensure that it aligns with the needs and goals of your business.
Additionally, effective contract management plays a crucial role in commercial leases. Once the lease is signed, ongoing contract management becomes essential to ensure compliance with the agreed-upon terms throughout the duration of the lease. This involves monitoring key dates, such as rent payments and renewal options, as well as maintaining proper documentation and communication with the landlord. Diligent contract management not only mitigates the risk of contractual disputes but also allows for proactive decision-making to optimize the lease arrangement for the success of your business.
Some standard provisions that a landlord may include in a commercial lease include the length of the lease, the amount of rent to be paid, maintenance and repair responsibilities, and any restrictions or limitations on the tenant’s use of the property. It’s essential to thoroughly review and understand these provisions before signing the lease to ensure that you are fully aware of your rights and responsibilities under the agreement.
Overall, a commercial lease is a crucial document for any business looking to lease commercial property. It’s essential to carefully consider the terms and provisions of the lease before signing it to ensure that it meets the needs of your business and protects your interests.
Types of Commercial Leases
There are several different types of commercial leases that you may encounter when looking for a property to lease for your business. Understanding the differences between these leases can help you choose the best fit for your business needs. Here are some common types of commercial leases:
- Gross Lease: In a gross lease, the landlord covers all expenses associated with the property, including utilities, taxes, and insurance. The tenant pays the landlord a flat rate of rent, with no additional charges. This lease is primarily for more significant properties, such as office buildings or shopping centers.
- Net Lease: In a net lease, the tenant is responsible for paying a portion of the property’s expenses in addition to the base rent. There are several variations of net leases, including the single net lease, double net lease, and triple net lease. The tenant is responsible for paying property taxes and the base rent in a single net lease. In a double net lease, the tenant is also responsible for paying property insurance, base rent, and property taxes. In a triple net lease, the tenant is responsible for paying all property expenses, including utilities, insurance, and taxes, in addition to the base rent. Net leases are typically for smaller properties, such as standalone retail stores or warehouses.
- Modified Gross Lease: A modified gross lease is a hybrid of the gross and net leases. In this type of lease, the landlord covers some of the property’s expenses, such as taxes and insurance, while the tenant is responsible for paying the utilities and a portion of the base rent.
- Percentage Lease: In a percentage lease, the tenant pays a base rent plus a percentage of their sales revenue. This type of lease is primarily for retail properties, where the landlord shares in the success of the tenant’s business.
Understanding the differences between these commercial leases can help you decide the best fit for your business. It’s essential to carefully consider the terms and provisions of each type of lease and how they align with your business needs and goals before signing a lease agreement.
Critical Components of a Commercial Lease Agreement
A commercial lease agreement is a legally binding contract outlining the lease terms and conditions between the landlord and tenant. It is essential to carefully review and understand the terms of a commercial lease agreement before signing it to ensure that it meets the needs of your business and protects your interests. Here are some critical components of a commercial lease agreement:
- Length of Lease: The length of the lease is an important consideration. Commercial leases are typically longer than residential leases, often lasting for several years. Choosing a lease length that aligns with your business’s needs and goals is essential.
- Rent and Rent Increases: The rent is the amount of money the tenant pays the landlord in exchange for the property’s right to use. It’s important to carefully review the amount of rent specified in the lease agreement and consider any provisions for rent increases throughout the lease.
- Maintenance and Repair Responsibilities: The lease agreement should specify who is responsible for maintaining and repairing the property. In some cases, the landlord may be responsible for maintaining and improving the property, while in other cases, the tenant may be responsible for specific maintenance and repair tasks. Some landlord responsibilities may include maintaining commercial surveillance camera systems, repairing appliances, and following building safety or health codes.
- Restrictions and Limitations: The lease agreement may include provisions that restrict or limit the tenant’s use of the property. For example, the tenant may be required to obtain the landlord’s permission before making any alterations to the property. It’s important to carefully review any restrictions or limitations in the lease agreement to ensure that they align with your business needs.
- Termination Rights: The lease agreement should specify the circumstances under which the tenant or landlord can terminate the lease. Understanding your termination rights under the lease agreement is essential to ensure that you are protected if you need to end the lease before its expiration date.
Overall, a commercial lease agreement is a crucial document that outlines the terms and conditions of the lease between the landlord and the tenant. It’s important to carefully review and understand the critical components of the agreement before signing it to ensure that it meets the needs of your business and protects your interests.
Understanding Your Business Needs
Before signing a commercial lease, it’s essential to take the time to understand your business’s needs and goals. This reflection will help you choose a lease that aligns with your business’s objectives and ensures that you have a suitable space to support your operations. In this section, you’ll learn how to determine your business’s space requirements, identify your ideal location, consider the lease terms, and assess the property’s condition. Taking the time to understand your business’s needs will better equip you to make an informed decision about the best commercial lease for your business.
Determining Your Business’s Space Requirements
Before placing an offer on new office space or retail property for your business, you need to know how much space you’ll need. You can easily calculate the amount of space you’ll need by gathering a headcount of your employees. You should allocate around 70 square feet of space per person within your company. If your employees feel cramped at work, you could lose employees to other companies with better working environments and remote work schemes, so it’s best not to try and cut costs for space.
Identifying Your Ideal Location
To identify the ideal location for your offices, list any suppliers you need to situate your business near. You should also consider your employees’ commuting time and avoid drastically changing their work route if you move offices. Amenities and transport links close by is a plus.
Considering the Terms of the Lease
Regarding your lease agreement, you need to look closely at the terms. The following lease agreement terms are ones you should look for and consider when reviewing your lease agreement:
- Base rent – this should be based on the square footage of the space you’re considering letting for your business.
- Usable square feet – some of the space you rent will be unusable if you’re sharing the area, so it’s good to know how much space your business is entitled to upon moving into the property.
- Length of lease – a typical commercial lease agreement will be between three and five years. You must remember your end-of-lease date to make arrangements for renewal or termination.
- Improvements – if you wish to make alterations to the space for your business, you need to look at the improvements clause. This clause will dictate which changes you can create and who is responsible for some aspects of property improvement.
- Rent increase – your rent is likely to increase year on year. Understanding the percentage of yearly rent increases will help your business with financial forecasting and planning.
- Condemnation – to be noticed, this part of the rental agreement will discuss what will happen should the landlord lose ownership of the property.
- Obligation for repair – in the repairs section of your lease, you will see all terms relating to the repair and maintenance of the property, along with who is responsible for specific repair tasks.
Assessing the Condition of the Property
Before signing your lease agreement, you should assess the property’s condition. To do this, you must hire a professional surveyor who can spot any potential issues with the property that may factor into your decision to sign.
Reviewing the Commercial Lease Agreement
Let’s cover some basic things to understand regarding your lease agreement contract.
Understanding the Legal Language of the Agreement
Legal jargon can be challenging for a layperson to understand and interpret. If you cannot understand your lease agreement, you will need the assistance of a legal professional. Outsourcing in your business is essential to reduce your responsibility and acquire expert knowledge. They will be able to talk you through the terms and what they mean for your business. Hiring a professional is always advised when making big financial decisions regarding your business.
Reviewing the Length and Renewal Options of the Lease
Knowing your options when your lease is up is essential for making any business plans. When the lease ends, you could have the opportunity to renew the lease, which would save your business the expense of moving to another location. So, review the lease length and whether there will be an opportunity for renewal.
Examining the Rent and Any Increases
You need to know the base rent for your property, which is the amount you’ll pay each month per square foot of the commercial property. The lease should also dictate how much of the space is usable and how much of the area is shared. If there are any year-on-year rental increases, this figure will be shown as a percentage in the lease agreement.
Reviewing the Maintenance and Repair Responsibilities
If your business is responsible for any maintenance and repairs on the property, this will need to be factored into your yearly budget. To understand your financial burdens for the property, you need to review the maintenance and repair responsibilities. If the terms seem unreasonable, you can argue for an alteration.
Clarifying Any Restrictions or Limitations
Your landlord may have placed restrictions or limitations on what you’re allowed to do with the property – including any changes you must make. You should list any rules you wish to dispute.
Understanding Your Termination Rights
If you wish to end your lease early, you must have favorable termination rights. Checking and amending the termination rights could help you down the line if your business’s profits decline and you need to terminate your lease and downsize to a smaller commercial property.
Negotiating the Commercial Lease
You are within your rights to negotiate any terms in your commercial lease. Here’s some information that could aid in your negotiations.
Identifying Areas for Negotiation
When reviewing your lease with your lawyer, you should identify critical areas you plan to negotiate. It can also be helpful to determine which negotiations are a priority, as you can cease negotiations should you not be able to come to terms on these points.
Leveraging Your Negotiating Position
As the interested tenant, you have leverage in the negotiations, as the property owner will likely wish to fill the property quickly. Time is of the essence, and they will probably want a speedy resolution. You can leverage your negotiation position using the following techniques:
- Competitors – you should evaluate any competitors during the lease negotiation to drive home any areas where the landlord’s competitors exceed their offerings.
- Question figures – you must verify any calculations your landlord makes to rationally dispute any little figures in the contract. If they cannot justify their calculations and estimates, you will likely overpower them during negotiations.
- Legal assistance – you need a legal representative that is genuinely excellent in finding details in the lease and arguing your case in negotiations.
Discussing Rent Abatement or Free Rent Periods
A free rent period is during the lease when you are not obliged to make any rental payments. The free rent period is a bonus that usually comes in at the beginning or end of the lease. You should request a free rent period in your rental negotiations. On the other hand, a rent abatement period occurs when a natural disaster or fire on the property renders it unusable. During this period, you shouldn’t have to make any rental payments, which you should reflect in the lease.
Negotiating the Length and Renewal Options of the Lease
If you wish to lengthen or shorten your lease due to foreseeable changes in the business, you should incorporate this into your negotiations. You should also negotiate renewal options. Moving your company at the end of a 5-year lease may be expensive, and you need more preparation to enter into such a short arrangement.
Seeking Professional Help in Negotiations
Although you might consider yourself a specialist in legal agreements and lease terms, a legal professional will deal with these cases daily. So, you should always seek professional help. More is at stake for your company should you miss any vital details in your lease agreement and neglect to negotiate them.
Signing the Commercial Lease
Once you have successfully concluded negotiations, you can sign the commercial lease. Here are some steps and practices to remember during the signing phase.
Reviewing the Final Draft of the Agreement
Once the negotiations have concluded, the landlord’s lawyer should draw up a new draft of the lease agreement. Your lawyer can then review the agreement to determine whether the correct changes have been made. Once they are happy with the lease contract, you can check the final draft, which is ready for signing.
Getting the Agreement Reviewed by a Lawyer
If you have not sought legal counsel during the lease agreement process, you should hire one to review your final lease agreement draft. If you missed an essential aspect of the contract in negotiations, they can spot it and advise. Getting a second opinion can help you better understand what you’re signing and whether any clauses have consequences you had not foreseen.
Signing the Agreement and Paying Any Deposits or Fees
When you sign the agreement, you need a witness. This witness can be a lawyer or individual without personal ties to the matter. The witness will also sign the lease. Once you sign, you will be expected to pay upfront costs like rental and security deposits.
Managing the Commercial Lease
Your duties regarding the lease agreement will not cease upon signing. Here’s what to expect during your commercial lease.
Understanding Your Ongoing Responsibilities Under the Lease
Your ongoing responsibilities under the lease will consist of making your rental payments, keeping track of any rental increase, and paying your common area maintenance fees. You will also need to make careful notes regarding the end-of-lease date so that you have a reminder to decide whether you’d like to terminate or renew when the time comes. You can implement lease management software to automate reminders for your lease responsibilities.
Maintaining the Property and Complying with Any Restrictions
Your lease will likely contain a list of duties you must perform to maintain the property, such as hiring cleaning staff, taking care of common areas, and maintaining any bathroom or heating apparatus in the building. You must also factor these costs into your quarterly and yearly budgets.
Communicating with Your Landlord
Throughout your lease, it can be helpful to maintain communication with your landlord to ensure you’re adhering to the lease agreement. Any communications between you and your landlord should be in writing via text or email. Keeping records of your contact will help you in a dispute or problem.
Handling Disputes or Problems That Arise
If you have documented your communications with your landlord, it will be easier to resolve disputes and disagreements. If you have an argument that arises during your lease, or your landlord is threatening you with eviction, you can always take the matter to small claims court. This evidence will work in your favor if you have documented evidence to support your claim.
Terminating the Commercial Lease
If you need to end your lease, whether early or at the end of your lease, here’s what you need to know.
Understanding Your Termination Rights Under the Lease
If you need to terminate your lease early, you can discover information regarding your rights in your lease agreement. If the lease dictates that you cannot end early, you can communicate with your landlord to discuss your options. If your landlord has breached terms in the lease agreement or raised the rent and you cannot pay, you can take the matter to small claims court should they not grant you leave to terminate the lease.
Providing A Notice of Termination
You must do it in writing when you provide your notice of termination. A verbal ending does not hold up in a legal context. You’ll need to draw up a notice of termination that includes the following information:
- Notice period – you should include the termination notice date, the notice period, and the date you plan to move out. The landlord will consist of the notice period in your rental agreement.
- Deposit amount – you should specify the deposit amounts you paid upon signing the lease and how much you expect them to return to you following the lease’s termination.
- Key return – you should consider including a date and time for the critical handover upon moving out of the property or specify that you will deliver the key in person to the landlord’s offices.
Handling Any Early Termination Fees
The early termination fees will be specified in the lease agreement. Before terminating your lease, you should ensure that you have enough to cover the expense. This fee is in place to protect your landlord and provide them with money to fund property marketing, as the cost will arise unexpectedly and needs to be accounted for in their budget.
Returning the Property to the Landlord
Once you have specified a move-out date and a date for returning the keys, you should ensure that you have completely cleared the property. If set in the lease agreement, you should hire a cleaning service to ensure the property is in excellent condition upon departing. You should also ensure you deliver the keys on the specified date.
Entering into a commercial lease agreement can be an overwhelming undertaking. Taking advantage of professional help can alleviate your responsibility and reduce the potential for error. Hopefully, this guide has given you some considerations you must make before signing a commercial lease. Commercial lease clauses directly impact your business health, and the lease agreement process is fundamental.