The Basics of a Commercial Lease Agreement in Michigan

If you are looking for commercial space to set up your business, you might want to begin your search with a favorable lease. You don’t want your first year in the new location to be riddled with high expenses from a high rental rate. What this means is that you should have a clear understanding of what makes a fair lease, one that will meet your business needs without straining the resources.

So, let’s look at the basics

What is a Commercial Lease Agreement?

A commercial lease agreement refers to a legally binding contract that recognizes the landlord and the tenant as the parties to the agreement while distinguishing the responsibilities of either party. Once signed, the lease agreement signifies that the landlord had transferred the rights to use the commercial property to the tenant for a specific duration. In exchange, the tenant pays the landlord rent periodically, as agreed. The contract is also called a commercial property lease agreement or a commercial real estate lease agreement.

Understanding the elements and the terms of your lease ensure that you spend less time and money on the contract while getting adequate protection. To be on the safe side and for validity, your Michigan commercial lease agreement should be prepared according to the statutory requirements of Section MCL-174-1962-2A.

So, which are the elements that you should review or negotiate?

The Lease Term

This defines how long the lease will run. It could be a short term or a long term lease. Startups and small businesses fair well with short term leases because of the uncertainties around small business. Forfeiting a lease before it ends often means loss of money. As a result, long term leases are common with an established business.

Regarding the lease term, you also have fixed term and periodic lease. A fixed term lease has a predetermined end date. The landlord cannot increase the rent charged or change the terms of the lease when the lease is active; except when they include a clause that gives them express authority to alter the terms of the lease. Since the lease has a known expiration time, tenancy termination notices are unnecessary.

The periodic lease, on the other hand, lacks a definite end date. The lease is renewed automatically which means that the terms of the lease also change during the lease term. But, the landlord has to issue a notice before they increase rent or change the terms. Either party can issue a notice to terminate the tenancy with this lease.

Rent

• All leases charge a bare minimum as rent per square foot. However, the base rent is only the gross amount of rent a tent pays. In addition to the base rent, the terms of the lease might indicate that the tenant pays part or all the operating expenses for the commercial space. In the commercial lease agreement in Michigan, a tenant chooses between the gross lease, net lease, modified gross, or the percentage lease. These mean that the tenant pays for expenses like the property taxes, common area maintenance (CAM), insurance, utilities, and the janitorial services.

• • Gross/ Full Service Lease

• In this lease arrangement, a tenant pays the base rent and the maintenance costs and for the property. The figure is fixed and the main expenses included are the utilities, maintenance, and taxes. Since the amount charged is fixed, you know what to pay monthly or quarterly.

• • Net Lease

• With a net lease, the tenant shoulders responsibility for the base rent, and they also pay for all or some of the expenses like the property taxes, insurance, and the common area maintenance expenses/CAM. There are three main types of net leases: single, double, and triple. The triple net lease is the most common one. With the triple net lease, a tenant bears responsibility for the property taxes, insurance, and CAM in addition to the base rent.

• With a single net lease, the property taxes are the tenant’s responsibility, and in the double net lease, the taxes and insurance costs are borne by the tenant. In all these three types of leases, the common costs are the base rent, utilities, and cost of janitorial services.

• • Modified Gross Lease

• This is a hybrid of the net lease and the gross lease. The operating expenses for the commercial space are apportioned between the property’s landlord and tenant. The tenant will pay the lump sum figure to the landlord. However, the landlord may bear responsibility for the utilities and janitorial services.

• • Percentage Lease

• If you are leasing space in a shopping center or a mall, you might have to pay the base rent and a percentage of your gross income to the landlord.

• What else should you pay attention to?

• • Terms of the tenant allowance

  • Whether you need a personal guaranty

  • The amount of the security deposit

  • Escalations charged

  • Relocation, renewal and renovation provisions

  • ADA compliance

Whether you live in Detroit, Grand Rapids, Ann Arbor, Kalamazoo, Lansing, Flint or any other city in Michigan, you may download our free commercial lease agreement forms to get started today.