The Basics of a Commercial Real Estate Lease
What You Can Expect from a Commercial Lease
Just like a Letter of Intent, a lease will always include customary clauses. These clauses will include much more detail than the Letter of Intent, which is essentially an outline for a lease, and the main reason you will need your broker and attorney involved at the very beginning.
Depending on the sophistication of your landlord, your lease will likely include the following:
Notice addresses: These are the official addresses where the parties receive mail. This address is very important - if the landlord needs to notify you of something crucial to your lease, you do not want to miss it.
Property description: Much more than an address, this is the legal description of the property so that there can be no dispute as to what you are leasing.
Security deposit: How much is your security deposit? What is it securing? When is it refundable? Can it be applied toward your rent? There are many different options when it comes to negotiating on the security deposit. Lean on your broker and / or attorney for recommendations here.
Rent adjustments: How much will your rent increase monthly? Annually? Will it increase at all throughout the term or will it stay flat?
Use of premises: Detailed discussion of how you are allowed to use the premises. The purpose of this clause is to protect other tenants from disruptive activities and ensure that the operations within the buildings are up to current zoning and codes.
Common area operating expenses: What will you have to pay for common areas? What will the landlord maintain, and what is your responsibility? What is considered or designated to be a “common area?”
Defaults by either party: This clause defines what constitutes default (i.e., late rent payment by tenant, failure to maintain the building by landlord) and the available remedies.
Building access: Is there twenty-four-hour access to the building? Or is the HVAC turned off at 7:00 p.m.? If you like to work late at night or on weekends, pay attention to this clause!
Holdover at the end of the lease: The typical fee for staying in the space after the lease term ends. In Nashville, we typically see anywhere from 150 percent to 200 percent of current rent.
Insurance, indemnification, and liability: How much insurance is required by each party? Which party is responsible if someone is injured on the property?
Lawsuit guidelines: This clause sets forth choice of law and venue in case of a lawsuit and whether arbitration is required. While it isn’t fun to think about, it’s best to make sure everyone knows exactly how this will be handled.
Every Commercial Lease is Different
Although you’ll typically see all of these items discussed in a lease, no two leases are the same. Landlords often have experienced attorneys craft their own, proprietary leases, so it’s not surprising that they will be somewhat skewed in the drafter’s favor. However, this doesn’t mean the lease can’t be changed or negotiated. It just means that you need to have your broker and attorney representing you at all times.
Remember, your lease will be one of your business’s biggest expense items, and you cannot take this process lightly. I highly recommend that you thoroughly read your lease and ask your representation any and all questions you may have. At the end of the day, your business (and pocketbook!) is on the line.
Want to dive deeper into leasing? Check out our blog on How to Lease Like a Pro.