Real Estate Reactions: What is a Commercial Lease?
What is a Commercial Lease?
In most cases, businesses choose to rent property because purchasing can mean a large, long-term capital investment – leasing requires less up-front capital, and also reduces the business’s exposure to the volatility of the real estate market (your business is in the business of… well, whatever its business is! it’s NOT in the real estate investment business, so bolting on a bunch of unnecessary real estate price risk – not to mention tying up a huge amount of capital – may not make sense). A commercial lease is a legally binding contract between a tenant and a landlord to rent space for a business. The commercial tenant may be anything from a sole proprietorship to a franchise to a large, multinational corporation. A commercial lease agreement sets out all the legal obligations between the parties and grants the tenant specific rights under its conditions.
What Differentiates a Commercial Lease Agreement From a Residential Lease?
Because a commercial lease is a fully-customized, legally-binding contract that can have long-term financial and legal implications, it’s critical to understand its terms and its obligations before signing. Commercial leases and residential leases are very different legal documents.
Commercial leases tend to be longer in duration than the typical one-year residential lease. The term of a commercial lease is usually three to five years in duration.
Most commercial lease agreements have varied terms to accommodate different tenants’ needs. Consequently, there is no standardized format and agreements can vary greatly from lease to lease.
There are fewer legal protections with commercial leases, and the consumer laws that protect residential tenants do not cover commercial lease agreements.
Commercial lease agreements are more flexible and negotiable between the parties, with the ability to fully customize the terms. These will include the rental amount, the term of the lease, what other costs are involved, what improvements are allowed, what communal areas are included, and many other critical matters.
Know What Terms Are Best for Your Business
Because a lease agreement is a legal contract that can be fully customized depending on the needs of the parties, you want to go into negotiations fully understanding yours. But most commercial leases are written with the landlord’s rights in mind. Before signing your lease, you should completely understand its terms and how they may impact your business. Not understanding what you are signing and what your rights are can have serious consequences after the fact.
Description of the Property You Are Leasing
A commercial lease should clearly set out the description of the property you are leasing in addition to what areas of the property you have use of such as parking, restrooms, kitchen areas, and other common areas.
Rent Amount and What it Includes
Commercial rent is typically calculated based on usable square footage. But it is important to understand what is considered in this usable square footage figure. Does the rent include utilities? Does it include your portion of the insurance and property taxes? Does it include any repairs? You may be obligating yourself to these things separately as “other costs” that should be thoroughly understood before you sign the lease since they can quickly add up.
Term of Your Lease
While most landlords want longer-term tenants, many business owners don’t want to be tied to a longer lease. It may be possible to negotiate the term of the lease with the ability to renew. Even if it requires a raise in the rent upon renewal, it is often a better alternative than being tied to a longer-term lease.
What Are the Terms of the Security Deposit?
Your lease should address the amount of the security deposit and under what conditions you will receive this money back.
What Improvements You Can Make
A commercial lease should clearly set out what modifications or improvements you can make to the space and who is responsible for paying for them. Be aware if you expected to return the space to its original condition once the lease is up.
Is There a Use Clause?
Some commercial leases specify the type of activities that the tenant can engage in on the property. While this limits the landlord’s liability, as a business owner you want as broad a use clause as possible considering your business and any possible future expansion.
Is There an Exclusivity Clause?
Exclusivity clauses prevent a landlord from renting space to a competitor of yours or someone with a similar product. If yours is a retail business, this is something you will want to be included in your lease.
It is common for a commercial lease to provide for an annual rent increase. While this is customary, a business owner should consider trying to negotiate a percentage cap to ensure that those rental increases don’t become unmanageable in the future.
Subletting or Assignment
In the event that you decide to move or your business is not successful, you don’t want to be left on the hook for paying rent for the remainder of the lease term. There are two alternatives available to consider. A sublet or assignment clause offers you the ability to have someone else cover rent for the remainder of the lease term if you cannot do so.
If your business relies on visible signage from the street, you will want to be sure that you are not prohibited from doing this in your lease agreement. Checking with local zoning regarding signage restrictions is also essential.
If your business is open to the public and employs more than 15 people, the law requires you to comply with the Americans with Disabilities Act and make the space accessible for those with disabilities. Your lease should specify who will be responsible for any changes that must be made for compliance and who will pay for it.
Other Resources – The Series LLC
If you would like to learn more about some of the different options available for real estate investors to protect themselves, you can also listen to our video on the Series LLC here:
Getting Professional Assistance
Because laws change constantly and there are many moving parts in a commercial lease agreement, components should be thoroughly examined from all angles. It is always advisable to get professional assistance before you sign any commercial lease agreement to understand your rights and your obligations. When you are considering a commercial lease, the San Antonio real estate attorneys at the Law Offices of Ryan Reiffert, PLLC are happy to help. Contact us to schedule an appointment.