Things to Review Before You Sign a Commercial Lease Agreement in Kentucky
Commercial lease, office lease, or real estate lease are words that get thrown around a lot. Everyone looking for office space, a warehouse, or commercial space for a retail store speaks the lease-related language, or they try to sound like they know what they are talking about. But, in the real world, out in the streets, few people understand the elements of leases and the agreements they sign so blindly. So, we’ll focus on commercial leases here. The terms that could mean paying more rent than you should. Clauses that give tenants unreasonable obligations. And clauses that landlords use to extort more money for you.
Here’s a quick definition: a commercial lease agreement is a legally binding document or contract that gives a tenant rights to use commercial property for a specific duration of time. In return, the landlord gets rent for the leased space. The tenant may also pay for the property expenses (taxes, insurance, and common area maintenance/ CAM), utilities, and janitorial services. In short, this document articulates the obligations of the landlord and the tenant. Once signed, you cannot cry foul, should the terms of the lease turn out to be unfavorable. Given the complexities of the Kentucky commercial lease agreement, learn about all the elements of the lease before signing it off.
So, how do you sign a lease with favorable terms?
Evaluate your business needs
How does this affect the signing of the commercial lease? Well, even when money is not a problem, you’ll find yourself negotiating for better deals. But, you cannot negotiate for better terms when the commercial property doesn’t meet your current and future needs. Look at your needs as the problem you are trying to solve. Check the size of the space? How much you’ll spend on renovations and fittings? Is the length of the lease reasonable? By checking the suitability of the lease against what your business needs, you will find the commercial space that makes you and your clients happy, now and in the next few years.
Check the lease length
A commercial lease is slated for a specific number of months or years. And you will have to pay for that space as long as the lease is active.
Usually, you have short term and long term leases.
A short lease is flexible, it doesn’t require a long term commitment, and they fit small businesses and startups.
Long term leases, on the other hand, leave little room for renegotiation after a few months. You’ll pay less money given the security given to the landlord. And you will receive concessions like tenant improvement allowances or free rent the first few months when you start. These benefits accrue because the landlord has little time to recover the expenses.
Choosing the lease term will, therefore, depend on the business you are running. A well-established company would choose a long term lease rather than a short term lease.
That brings us to the fixed term and the periodic leases.
The fixed term lease is, as the name suggests, time specific. You have a specific start and end dates. During that time, the terms of the lease remain unchanged, and the rent doesn’t go up. The only acceptable reason for the change of terms is a clause in the lease. You should sign the lease aware of little clauses that give the landlord more leeway.
Periodic leases, on the other hand, are auto-renewal leases. They lack an end date, but they are renewed after some months or years. The terms may change during renewal.
Identify the type of lease befitting your needs
In the commercial lease agreement in Kentucky, specifically under the rent and expenses section, you’ll need to check the boxes for your preferred choice of the lease. The lease chosen affects how much rent you pay.
Other than the short term, long term, fixed term, and periodic leases, there also are gross, net, modified gross, and percentage leases.
• Gross Lease (Fixed Service lease)
This lease indicates that the tenant pays the base rent as well as the operating expenses for the commercial property. These expenses include CAM, insurance, utilities, and taxes. The amount indicated is fixed, and you don’t have a say on how much the expenses cost. Though predictable, it lacks transparency.
• Net Lease
In the net lease, you pay your base rent as well as the cost of the property’s insurance, taxes, and/or CAM. The net lease you select can be one of three: single, double or single lease. These leases vary depending on the expenses you'll shoulder on top of your base rent. The triple net lease (NNN) is the most common and tenants pay the base rent plus the property taxes, insurance, and CAM. For single and double net leases, tenants pay the base rent in addition to the taxes or taxes and insurance, respectively.
• Modified Gross Lease
This is a hybrid of the net and gross lease. The expenses are shared between the tenant and the landlord.
• Percentage Lease
In this commercial real estate lease agreement, the tenant agrees to pay the base rent as well as a percentage of their gross income. It’s common with retail businesses in malls.
What else should you check in the terms of the lease?
ADA Compliance: often, it’s the landlord’s responsibility to make the property friendly to disabled individuals.
Parking: will you get enough parking?
Subleasing: can you assign and sublease the property?
Escalations: how much is the landlord charging as escalation fees?
Can you renew the lease?
What happens if the landlord needs to relocate you? Will they take care of the relocation costs, as well as renovations of the new space? Will the rent and terms of lease change after a relocation?
Ready to find a business lease agreement in Louisville, Lexington, Frankfort, Bowling Green, Paducah, Owensboro, Hopkinsville or any other city in Kentucky? Get started with our free commercial lease agreement forms today.