A Comprehensive Guide of a Commercial Lease Agreement in Hawaii
A commercial lease agreement is a legally binding contract created between a lessor and a lessee of the commercial property. The contract has specifics of the negotiated points that make up the lease. These points include the term of the lease, the cost of rent for the commercial space, and responsibilities borne by the lessor and the lessee. The lessor is the landlord; the lessee is the tenant; the lease agreement for commercial property is also called a commercial property lease agreement or a commercial real estate lease agreement.
Using a commercial lease agreement in Hawaii, you not only protect your rights to run business in that commercial space, but it also makes it possible for the lessor to prevent losses from non-payment or high maintenance costs.
Which are the main types of commercial property lease agreements
Fixed term and periodic tenancies
Would you like a fixed term lease, one with a predetermined end or would you rather a lease contract with an unknown end date? Business needs are at the center of the lease you choose. However, you also need to choose a lease that will protect your business, giving you value in the process. What this means is that you need to ask all the tough questions about the suitability of one tenancy over the other. Fixed-term and periodic tenancies have varying rights affecting the termination of the lease.
Note that choosing a fixed-term lease means that even though the landlord cannot change the terms of the contract or increase the rent before the end of the period, they might make changes that are unfavorable to your business. With this in mind, you may find that a longer fixed-term lease is favorable.
But, this may not be the best option when yours is an established business or when you know that you will use the space for an uncertain amount of time, and that is where the periodic tenancy comes in. Periodic tenancies don’t have predetermined end dates, and either party can terminate the lease after issuing a written notice.
Keep in mind that most Hawaii commercial lease agreements run for 3-5 years, with 1-year leases and the 5yrs+ leases avoided. A one-year commercial lease is frowned upon because it involves too much paperwork, and the lessor incurs higher marketing costs once the space runs vacant. That makes long-term leases preferable.
Note, however, that you should avoid leases running for more than 5 years since the rent gets locked in with the fair value of the commercial property exceeding the lease rent. Also worth mentioning is the fact that the Hawaii Conveyance Tax should be paid on all subleases and leases on unexpired lease terms of 5 years or longer. So, to avoid the Conveyance Tax, you (the tenant) will only have 4 years and 11 months. The tax payable is often based on the annual rent payable throughout the life of the lease and the leasehold improvements.
Other factors to consider before you sign the commercial real estate lease agreement
Rent and Expenses
Understand the terms of the agreement with regards to the rent payable on the space. Besides the base rent, you may have to cover operating expenses for the commercial property. Your rent payment arrangement could be based on a gross lease which is a fixed amount that includes the operating expenses; a net lease where you pay the base rent and the property taxes, insurance and/or the CAM (Common Area Maintenance); or the modified lease that allows sharing of the operating costs between the landlord and the tenant. The net lease may be single net, double net or triple net lease.
Before you choose a lease, confirm the cost of the common area expenses, taxes, property insurance, utility charges, and when the payments are due.
Permitted uses of the premises
The landlord may be against some kind of business because it is undesirable to them or other tenants. So, even if you are looking for rental space that allows for a broad range of uses, confirm that your ideas can be realized in the prime commercial space. A lease with a provision for broad use may allow you to sublease or assign the space.
Specificity of delivery
The lease must be specific about the date that the landlord delivers the premise to you. Also, understand your options should there be a delay in terms of delivery. For example, you should be able to terminate the lease for late delivery.
Tenant improvement allowance
You need to confirm if you will receive this allowance. The tenant improvement allowance depends on the qualifications of the tenant, the rental rate, size of the space, lease term, and the landlord’s willingness to grant the allowance.
If there’s a non-compete covenant, is there a radius where you cannot complete? And are the terms for non-compete reasonable, given the size of the island?
Subleasing or assigning commercial space
Are there restrictions that prevent you from subleasing office space? Do you need the landlord’s consent to assign or sublease space? Can you transfer the premise to another?
You also need to ask:
What happens if the landlord defaults the terms of the agreement?
Will you suffer consequences for not opening the business on a date you stated initially?
Can the landlord relocate you at any time?
Can you run your unique business exclusively in the business without having to worry about a competitor setting shop next door?
Do you have to sign a personal guaranty?
You can tell that there are numerous issues to clear before signing the lease, right? So, take time to evaluate all these elements and if you can, get a lawyer to evaluate the terms so that you run your business on favorable leasing terms.
To get started, you may want to download our free commercial lease agreement forms online. The forms are accessible statewide from Honolulu, Kailua, Hilo, Pearl City, Kaneohe, Kahului, Waipahu, East Honolulu, and any other beautiful city in the island of Hawaii.