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Beefing Up the Commercial Lease Agreement

Commercial Lease Agreements are fairly flexible in that the parties entering into the agreement have a lot of room to negotiate general and specific terms of the deal.

Whether you are a landlord or tenant, here are a few items you should focus on:

  • Price & Term

  • Total Space

  • Permitted Use

  • Real Estate Taxes & Insurance

  • Common Area & Maintenance Charges ("CAM")

  • Insurance Coverage

  • Default Clauses

  • Guaranty

  • Conditions in the Agreement

Price & Term. Price & Term are essential for any lease agreement. Both parties must submit and accept the price in which tenant will pay to landlord (landlord to accept payment) and over what term. Generally, price usually refers to 'Fixed Rent' over a number of years (the "term period"). Parties are free to negotiate the terms of payment (how much, when, and by what method of payment). The term will also differ based on the business. For example, if a restaurant is looking for a new space and will also need to make alterations and improvements before opening the business, they will likely want to enter a longer lease term. Additionally, under that example, they may want to have the rent commencement date (i.e. when they will start paying rent) to be pushed out 30-60-90 days while they make their alterations and improvements.

Total Space. When it comes to total space, a few things come to mind. First, both the Tenant and Landlord must identify what space is being leased. Second, as it relates to the total space, the Tenant will most likely being paying a "proportionate share" of the Landlord's operating expenses (e.g. CAM charges, taxes, and insurance). From the Tenant's perspective, knowing the needs of the business is important. If a Tenant is a growing business, and they need more space (like the example above), but lease more space than they currently need, they should consult with their attorney on how to structure the deal. Sometimes, Landlords will allow a lower rate (per square foot) at the beginning of the lease term but will want to receive more money later in the lease term to average a price per square foot that they desire.

Permitted Use. Undoubtedly, both parties want to identify the permitted use of the space. Landlord will want to make sure there are permitted and prohibited uses identified in the agreement. Vice versa, a Tenant will want to look at what restrictions they may have if they enter into the agreement. It is important that you identify the permitted use so you do not run afoul with any permitting at the location of the real estate.

Real Estate Taxes & Insurance. If a new building is erected and you become one of the first commercial tenants to enter the leased space, how do you know what taxes you will pay? Are you going to lock in at the current fiscal year? Has the space been reassessed and the amounts reflected in the most current tax year? A Tenant and Landlord will want to explore these areas as it will have an impact on who foots the bill and at what proportion. Likewise, with insurance, it is important to know what your base year will be when you pay your share of insurance coverage.

Common Area & Maintenance Charges ("CAM"). CAM charges are standard in any agreement. These are "operating expenses" that a landlord can bill to their Tenants. From the Landlord perspective, it is important to have an idea of what sort of charges may come up in the future. Do you have to repaint the exterior of the building? Replace the fire alarms and sprinklers? Make repairs to the roof? Landlords should make sure to not limit or "cap" CAM charges because unexpected bills can have a major impact on Landlords if they cannot seek the help from their Tenants.

Insurance Coverage. It is important to know how much coverage the Landlord and Tenant have, per the agreement. Why? Because you do not want there to be a gap in the insurances if something goes wrong. Confirming each-others policies and amounts covered is crucial for both parties to be successful in the Lease.

Default Clauses. One of the most important clauses in any Lease Agreement are default clauses. If the Landlord or Tenant defaults, what happens? How are we defining what a default is? Is notice required on every default or is there an exception? Default clauses can initiate remedies for both the Tenant and Landlord and help mold the long-term relationship of the parties.

Guaranty. A guaranty is important, primarily for the Landlord. It can provide additional assurances in the event the Tenant's LLC or other business entity fails to pay any and all Accrued Rent and other sums identified in the Lease. From a Tenant's perspective, it is important to understand how long the Personal Guaranty is in effect and if there are any conditions that need to be made to remove such guaranty at a later date.

Conditions in the Agreement. Lastly, conditions that make the agreement effective, conditions prior to possession or performing specific duties is really important. If those conditions are not met, how do the parties proceed? What rights and obligations do the parties owe each other? These are the types of areas that both Landlords and Tenants should be focusing on when negotiating and working through their agreement.


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