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The Basics of the Commercial Lease Agreement
As your business grows, the bounds of your garage will cease to hold the spillover, profits, need for increased production or supply to meet your growing customer needs, as well as the increasing number of customers looking to make your shop their new home for those products or services. When this happens, you’ll have to deal yet another important monster in business, commercial leases. But even before you look at and find the documents necessary for the commercial lease, you have to find the ideal office or commercial space to run your business.
The location you settle for should meet all your business needs in terms of accessibility, budget, size, availability of human resources, the presence of human traffic, and a well-established infrastructure, among others. Once you identify a location with all the features needed for your business to grow, then you can look at commercial leases and negotiate the terms.
If this is your first interaction with leases for commercial property, you should that a commercial lease agreement is a legally binding contract drawn between a landlord and a tenant for business purposes. The signing of the lease signifies the transfer of the right to use a commercial space from a landlord to a tenant for a specific duration and a specific agreed amount. The agreement also outlines the rights and responsibilities of the landlord and the tenant in the course of the lease term. The commercial lease contracts are also called commercial property lease agreements, commercial rental, office lease, a commercial real estate or business lease agreement.
But what makes the commercial lease agreements different from the residential lease?
Well, tenants in residential spaces receive more protection from the government because most tenants rarely have all the information about leases and lease agreements and they may be taken advantage of. On the other hand, it is assumed that the parties in a commercial lease are educated about the issues that surround the leases, and they can also afford legal help and professional advice from professionals.
Other than the level of protection afforded, the commercial leases are more negotiable than the residential leases, although the residential leases offer an increased level of flexibility.
Being negotiable, the commercial lease may expensive or cheap, depending on your understanding of the terms and types of leases, and how they affect the overall cost of the lease. Before you sign the lease, review all the terms of the lease against your business needs and only sign the lease if the terms are favorable. Some of the lease terms you should evaluate include:
Type of property/ Description/ Zoning
The commercial property lease agreement must have the details of the business you intend to lease. First, ensure that the city or county officers zone the location for the kind of business you wish to run. Then, get the exact dimensions of the space. Confirm the address of the space and the ownership details for the space. Other than zoning, confirm the permitted uses of the space with the landlord.
This is the length of the lease. Is the lease term fixed or periodic, short-term or long-term?
When negotiating the terms of a lease agreement, it’s important to check that the terms of that lease will promote the growth of your business, even when the future of the business is uncertain.
Fixed end date lease: in this case, the lease termination date is known from the start. As a result, neither party has to notify the other of a lease pending termination. With this lease, the landlord may not increase the rent or even change the terms of the agreement unless when they reserve the right in the lease, and only if the tenant agrees to the reserve. The fixed term lease may also have its end determined after a specific number of weeks, months, or years.
Periodic Lease: this is the most common type of lease as it’s renewed automatically. This lease runs its course when either party issues a lease termination notice. The termination notice should be made within a time period specified by the statutes.
You also have short-term and long-term leases. Choosing one over the other depends on the level of growth and stability of the business. Small business or startups prefer short-term leases while the established businesses prefer the long-term leases. A safe and smart option, however, would be negotiating a short-term lease with the option of lease renewal.
All commercial leases require tenants to pay a base or minimum rent. However, in most cases, a tenant pays the base rent as well as property expenses or a percentage. This brings us to the main types of leases:
Gross Lease: in this lease, a tenant pays a fixed amount in rent. The amount charged may be inclusive of the property expenses, but it’s often the base rent only.
Net Lease: here, a tenant pays the base rent in addition to the property expenses; one or three – taxes, insurance and common area maintenance (CAM). The most common net lease is the triple net lease. It’s common and preferred by landlords because tenants pay the taxes, insurance premiums, and CAM in addition to the base rent, cost of utilities, and the janitorial expenses.
Modified Gross Lease: this is a hybrid of the net and the gross leases. The property expenses are apportioned between the landlord and the tenant, so the tenant pays the base rent plus a portion of the base rent.
Percentage Lease: in some jurisdictions retailers in malls or shopping centers are required to pay the base rent and a percentage of their gross income.
What else should you review and negotiate in the lease agreement?
Security Deposit: the amount asked may be non-negotiable, but you may negotiate the terms for returning the money.
Tenant Improvement: should you return the space to its original state at the end of the lease? Can you get a tenant improvement allowance?
Compliance: is the space compliant with the state and federal laws? Who is responsible for making the space ADA compliant?
Subleasing and assignment: can you sublease the space and assign a third party the right to use the property and the obligations in your name?
Relocation: will the landlord pay for the moving costs if they want you to relocate to a new place? Will the lease terms in the new location be similar to those of the old space? Will the space offer you the advantages you received from the older location?
Repairs: who is responsible for main structural repairs?
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In most states, the lease has to be acknowledged at the notary public once you agree on these terms. So, don’t overlook that step.
To get started with business leases, download our state-specific and free commercial lease agreement forms here.