Commercial Real Estate Lease Documents Explained
As you finalize the process of negotiating your commercial lease, you will be handed a commercial lease document. This document is a legal and binding contract between you (the tenant) and the other party (landlord or property manager). If you breach the contract (fail to fulfill your part of the bargain), your business could be sued and have to pay damages to the other party. Be sure to read it and ask questions before you sign it.
Have an attorney review the terms of the lease, to explain any specific terms that you don't understand, and to look for issues that might be a problem for you or are not what you thought you agreed to.
Sections of a Commercial Lease
Here are the common sections of commercial leases, and a brief explanation of these sections.
The parties are the official names of the tenant and landlord. Make sure your business is the party described in the lease, not you personally. If something goes wrong, you don't want to be personally liable. You may be required to give a personal guarantee for the lease, but the documents can still be in the business name.
Terms used in the lease are defined, like what "common areas" include and the "leasable area" is defined specifically. Pay attention to these definitions, so you know what you are paying for.
Describes the space you are renting. Verify that you understand how space is assigned and what specifically you are paying rent on. That includes CAM — common area maintenance — which can be a hidden cost if you aren't careful.
Explains how the rent is calculated and when and how it must be paid, including what happens if the rent is not paid on time. Other costs associated with the lease, including common area maintenance (CAM), may be included in this section. Common terms such as "gross lease" or "triple net lease" may be included here; make certain you understand what these terms mean.
Explains when the lease begins and ends. This section may also describe how the lease may be re-negotiated.
Describes the security deposit the tenant is required to provide when it is considered to have been received, and the circumstances under which it may be forfeited or returned.
Explains what happens if the tenant does not leave at the end of the lease.
If utility costs are included in the lease, it explains how they are metered and distributed among the tenants. In some cases, each tenant may have a separate meter. If the tenant is paying the utilities, this section may explain the requirement to pay utilities and what happens if they are not paid on a timely basis. This protects the landlord if the tenant fails to pay utilities.
Lists the restrictions on the use of the premises, including signs, hours of use, and limits on occupancy and sub-lessees.
Taxes and Insurance
Discusses who pays property taxes and insurance on the property. This section usually includes a requirement that the tenant provides proof of insurance on property and equipment in the leased space and liability insurance, to protect the landlord. Usually, the tenant is required to indemnify the landlord [hold him/her harmless) in any liability suits against the tenant.
Describes the parking available for the leased space. Some lease documents differentiate between where employees may park and general customer parking. Make certain that the parking space conforms to ADA standards by providing adequate handicapped parking.
Describes who is responsible for making and paying for maintenance and repairs. Most leases require tenants to pay for repairs due to "wear and tear" (common usage), with the landlord being responsible for extraordinary repairs due to major damage or failure of equipment.
Assignment and Subletting
Some leases have a separate section describing the conditions under which you can sublet the space.
Describes the options you may have to rent additional space in the building if it becomes available, or options to buy the property.
Defaults and Remedies
Describes what happens if one party defaults (breaks the agreement), and the remedies available to the other party.
These clauses describe what happens if the leased space is destroyed or condemned.
Subordination, Non-Disturbance, and Attornment
Describes the rights of the tenant if the landlord's lender forecloses on the property. This section protects the tenant from being ejected by a new landlord or the bank.
Explains what happens if there is a change in the landlord's situation, to verify that the tenant is living up to his/her duties as a tenant.
Agreement about who pays attorney fees in the event of a lawsuit between landlord and tenant.
Some leases provide for alternate forms of dispute resolution, like mediation and arbitration. Many contracts these days include a mandatory arbitration clause. If you find this in your lease, you should discuss the implications with your attorney before you sign.