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COMMERCIAL LEASING 101: What A New Tenant Needs To Know

by | Nov 28, 2018 | Commercial Real Estate

Rarely does a day pass when you don’t hear of a new commercial development or creative retail endeavor. Given this continued wave of corporate growth and expansion, it is a perfect time to discuss a few common clauses in commercial leases that regularly cause headaches for tenants.

Take Autumn, two months ago, she decided to ditch her dull 9-5 and pursue her dream of selling dazzling handcrafted jewelry at a boutique shop. Autumn has regularly sold her jewelry at various markets and has developed a loyal following, made a bit of money, and is now ready to create a “brick and mortar” go-to spot for her unique brand. Autumn is planning for success from the beginning. She has worked with her attorney to create a limited liability company and engaged a realtor to find the perfect location on Cary Street. She discovers a perfectly-sized corner location with ample foot traffic. Given the economic boom in this area, Autumn’s prospective landlord informed her that he was not inclined to accept many changes to the lease form that he provided. Even though Autumn has contacted a real estate attorney to review the lease and walk her through the process, she still needs to have at least a basic understanding of the most pressing issues addressed in a commercial lease. Below are some important considerations for Autumn:

  1. Lease type and impact: A commercial lease should tell you what is included in the rental amount that you pay to the landlord. Most leases are gross leases, triple net leases, or fall somewhere in between. Unfortunately, not all leases will state explicitly into which category they fall, so you need to read the lease terms carefully.
  • A gross lease typically is all-inclusive, meaning that the tenant pays the landlord one sum and the landlord is responsible for payment of real estate taxes, insurance and maintenance expenses. Tenant utilities may or may not be included within a gross lease.
  • In a triple net lease, the tenant pays a set rental amount to the landlord, but also pays a share of the landlord’s real estate taxes, insurance, maintenance expenses, and building utilities.

By understanding the type of lease being sought by the landlord, it will provide you with a better idea of the total cost of leasing that space.

  1. The identification of the lease area: A commercial lease should clearly define the space that the tenant will be leasing, also known as the “demised premises.” Leases typically include both a street address and a site plan showing the demised premises. The lease should also include the exact square footage of the rental space. The description of the demised premises described in the lease must exactly match the space you are expecting to receive. Additionally, make sure that the leased space includes sufficient parking and signage rights to allow you to operate and grow your business.
  2. Rental rate- A commercial lease should plainly express what your rental rate will be for the entire term of the lease. Generally, this is done through a table which states the annual rental rate for each year of the lease and what the tenant’s equal monthly payments will be based on the corresponding annual rate. In most leases, the annual rental rate increases from year to year either by a flat amount or by reference to an exterior formula (i.e., in proportion to increases in the cost of living allowance). In some retail leases, the tenant is responsible for paying the annual rental amount plus a percentage of the tenant’s sales for the year, which is known as percentage rent.4.
  3. CAM– A triple net commercial lease should state the amount, if any, the tenant must contribute toward common area maintenance expenses, or “CAM.” CAM may include the costs of security, parking attendants, building maintenance, building management fees, outdoor maintenance, snow removal, etc. A common method for determining a tenant’s share of CAM is to divide the number of square feet in the tenant’s space by the total number of rentable square feet in the office building or shopping center. Don’t let CAM charges surprise you down the road, so push the landlord on your specific CAM obligations before entering into a lease. 5.
  4. Use of space restriction A commercial lease must outline your rights with respect to the demised premises. Office leases often state that the space will be used “for general office use and for no other purpose.” Leases for retail spaces often get more detailed and may even include specific prohibited activities. Depending on the nature of your business, you may want to seek an “exclusive,” which is a provision that gives you the exclusive right to operate your type of business in the building or shopping center. 

This list should provide some guidance for Autumn when initially reviewing her commercial lease, but it is by no means exhaustive. Commercial leases typically deal with a host of other issues as well, including the term of the lease, extension/renewal options, tenant’s ability to assign the lease or sublet the demised premises, maintenance obligations, improvements to the space, default and remedies for a default, hidden costs to the tenant, tenant insurance obligations, environmental contamination, etc. These are all important issues and must be understood by Autumn and analyzed by her attorney. As rental payments will likely be one of Autumn’s largest regular expenditures, it is well-worth her time, effort and investment to become knowledgeable about the ins and outs of commercial leases and to work with a trusted real estate attorney so that she can make an informed decision as to which type of lease arrangement best suits her needs.

 The above content is for information purposes only and cannot be construed as legal advice. This information is not a substitute for actual legal counsel.