A commercial lease is a type of contract between a landlord and a business to use the property for the purpose of running the business from that property. Businesses typically pay the landlord rent in exchange for usage of the property. Entering into a commercial lease agreement as a landlord or tenant is an enormous undertaking that can make or break your business. Whether you are a landlord or a tenant, you will need to negotiate the terms of a commercial lease. It is important that you understand the lease provisions before signing.
Commercial leases are commonly differentiated by the type of business using the property:
How Are Commercial Leases Different from Residential Leases?
Residential leases are designed for the enjoyment of a tenant’s personal time and space. Commercial leases, on the other hand, are crafted with the goal of running and maintaining a business. Although the two types of leases will share some aspects in common, such as rent and security deposits, commercial leases are different from residential leases in the following ways (please note that this list is not exhaustive):
- Greater need for modification of property or repair, such as additional wall outlets for phones or more room for extra cubicles
- Be sure that both parties can differentiate between tenant business property and the landlord’s property
- Prospect of exclusive use or non-compete clause, as businesses experience loss if a competitor opens up right across the hall
- Prospect of a longer term agreement
- Space for advertising and signs
- Other terms may apply
Does the Lease Contain the Basics?
There are certain provisions that every lease must contain. These include:
- Rent – How much and when rent is due, and if there will be increases
- Duration – When the lease begins, ends, and how to renew
- Security Deposit – The amount, how and when it is returned, and if a letter of credit can be used in lieu of cash
Who Pays for What?
Your lease should state who is responsible to pay for utilities, insurance and property taxes. Sometimes these costs are included in the rent. What is the duty to repair in a commercial lease and how can that affect my lease? A major defect at your place of business could have an adverse impact on your ability to consuct business - typically most commercial leases offer little protection to the leesee.
What about the Property?
The lease should also include provisions that describe the property, including:
- Spatial Specifications – The square footage, borders, parking, and common areas
- Maintenance – The party who will perform and pay for maintenance
- Improvements or Modifications – What alterations will be made to the property before the tenant moves in and who will pay for them
- Signs – The size and location of any signs needed for the business
- Zoning – The type of business allowed to use the space
Does It Plan for the Future?
You should also check for provisions relating to how the property can be used in the future, including:
- Sublease – If the property can be used by another and under what conditions, also referred to as Assigning a Commercial Lease
- Termination or Default – If allowed, how would it be done, and the penalties
- Dispute Resolution – Arbitration or court will be used if there is a dispute
- Non-Compete Clause – Forbidding the rental of nearby space to a competitor
What Happens If the Business Is Unable to Pay the Rent?
Landlords do not want to evict tenants: eviction proceedings are expensive and frustratingly sluggish.
Therefore, it is important for a landlord to recognize the first signs of payment delinquency. The tenant may approach the landlord before any nonpayment, asking for a reduction in rent. A tenant may pay a fraction of the rent, and then promise to pay the rest when an anticipated “big deal” comes through. These signs should raise suspicion in the mind of a discerning landlord. A landlord must determine the probability of payment, based on business factors such as profitability and financial indicators.
The next step is serving a 3-day notice, which states the amount due and gives the tenant 3 days in which to pay this amount before eviction commences. In California for example, a landlord can choose between stating an exact amount or an estimate. If choosing the latter, a landlord can overestimate the rent and still evict, but the judge can adjust the rent to a reasonable amount.
If the business still does not pay the rent, a landlord is left with no choice but to file an “unlawful detainer” to start the eviction lawsuit.
Do I Need a Lawyer to Review my Commercial Lease?
Commercial leases are very complex and often difficult to comprehend. An experienced real estate lawyer can help you understand all the provisions of your lease. A real property lawyer can also make sure that your commercial lease doesn’t include any unfair or illegal provisions.