Once you’ve discovered a commercial real estate property suitable for your unique business needs and goals, it’s time to go over the commercial lease terms and conditions. Commercial leases can be lengthy and wordy; however, it’s important that you fully read and comprehend each section before signing on the dotted line. You can avoid misunderstandings between your business and your landlord down the road by carefully reviewing your commercial lease clauses.
Commercial lease clauses are typically written specifically to comply with state and local landlord-tenant laws. They also serve to protect both the landlord and the tenant. Usually, commercial real estate clauses can be negotiated, which makes it even more important that you know and understand them before diving into a lease agreement.
What Types of Commercial Real Estate Clauses Are Typically Included in a Lease?
Here are some of the most important clauses in commercial lease agreements that tenants should know about:
1. Term
The lease term defines the entire period your lease is considered active, and how long the tenant is financially responsible for the space, even if the business were to close or relocate. The term clause also dictates when other terms of the lease, such as insurance coverage requirements, will go into effect.
2. Description of Premises Clause
This commercial lease clause identifies the space the tenant will occupy. This might be straightforward if the lease is for an entire building or property. However, if the tenant is only renting a fraction of the property, this clause would describe that space in detail.
Premises clauses are essential for co-occupancy spaces. The most common examples involve co-tenancy or shared retail spaces. Each of these co-occupancy scenarios comes with its own set of obligations and provisions that are dependent on its premises clauses. In these scenarios, your obligations can fluctuate depending on whether you share space and what portion of that space is your obligation.
3. Rent Escalation Clause
Most commercial leases contain a rent escalation clause that explains how and when the tenant’s rent will increase during the lease term. Escalation clauses may specify a fixed increase in rent over a period of time, typically annually or biannually, or when the landlord’s taxes, insurance, operating, and maintenance costs increase. Sometimes, rent escalation is based on the Consumer Price Index or other inflationary factors.
Sometimes rent escalation clauses can be negotiated with landlords directly on a tenant-by-tenant basis. The terms will outline when and under what conditions rent can increase, or in some cases, even decrease. These can include hybrid increases dependent on both economic conditions and operating costs. Some business owners will negotiate lower initial rates that rise as a business is established. Some landlords might incentivize longer-term leases promising to lower rent the longer the tenant stays in the unit.
4. Use Clauses
This clause defines how the tenant can and can’t use the property they’re leasing. The use clause may be very specific, so it’s important that you read its terms carefully. It may place limitations on the type of business the tenant can conduct, what products or services the tenant can offer, or even the quality level of the tenant’s operation.
Again, co-occupancy spaces including shared and co-tenancy may involve additional provisions. Common to these arrangements are “exclusive use” clauses which dictate the ways space can be used and under what circ*mstances relevant provisions apply. When sharing a single unit, exclusive use clauses can protect retailers if a tenant leaves the space. Shared space contracts may be specific about this upfront or can be negotiated with the landlord piecemeal. Some contracts will even grant the original tenant the power to sublet to a co-tenant for the life of the first tenant’s lease.
5. Improvements and Alterations Clause
This part of the lease explains what improvements or updates will be made to the space before the tenant moves in. It also states who will be responsible for the financial burden of the improvements. The alterations clause explains the tenant’s right to make changes to the space moving forward and the process for doing so.
6. Insurance Clause
To cover the risk of leasing commercial space, a lease may require the tenant to invest in insurance, such as property and liability insurance, rental interruption insurance, or leasehold insurance. Often, the types of insurance required can be negotiated with the landlord to suit the tenant’s unique business needs.
7. Renewal Clause
The renewal clause defines what steps the tenant must take for renewing their lease at the end of the term. Typically, the clause includes a notice period, the term length for the renewal period, the renewal rental rate, and the “fair market value” according to the landlord. The renewal clause protects the tenant’s rights and negotiation leverage in unfavorable market conditions.
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