A commercial lease agreement can be a powerful tool for landlords to secure a stable, long-term income from their properties. However, signing a lease is a significant commitment that can impact your finances, property management, and tenant relationships.
Before you put your signature on a commercial lease agreement, it’s essential to take the time to read and understand every term, clause, and detail. A thorough review will help you make informed decisions and protect your interests as a landlord.
Learn more as we discuss the key aspects of a commercial lease agreement that every landlord should consider, address some of the common questions tenants might ask, and explain how working with a commercial lease attorney can help bridge any gaps in your lease terms.
1. Understand Your Lease Terms and Structure
The structure of a commercial lease agreement can vary significantly based on the type of business your tenant is operating, the length of the lease, and the expectations both parties have. Some of the common lease structures include:
- Gross Lease: Where the tenant pays a fixed rent amount, and the landlord covers most expenses, such as maintenance, property taxes, and insurance.
- Net Lease: Where the tenant is responsible for rent as well as other expenses like property taxes, insurance, and maintenance.
- Percentage Lease: Where the tenant pays a base rent plus a percentage of their sales revenue, often used in retail settings.
As a landlord, it’s crucial to choose a lease structure that aligns with your financial goals and the property’s long-term value. Understand which expenses you’ll cover and which ones will be passed on to the tenant to avoid confusion or disputes later on.
2. Be Clear on Rent, Concessions, and Escalations
The rental rate is one of the most significant aspects of any commercial lease agreement, but it’s equally important to consider other financial aspects, such as:
- Concessions: Tenants may ask for temporary rent reductions or free rent periods, particularly at the start of the lease, to help with initial business expenses. Be clear about whether you’re willing to offer such concessions and ensure they’re documented properly in the lease.
- Tenant Improvement Allowance: Tenants often ask for allowances to cover the cost of improvements they may need to make the space suitable for their business. Decide if you’re open to providing such an allowance and, if so, how much.
- Escalations: Commercial leases typically include rent escalations or increases over time, often tied to inflation or other cost factors. Consider a clear and predictable structure for escalations, such as a percentage increase each year, so both you and your tenant understand how rent will change over time.
3. Address Signage and Visibility
Visibility is often critical for commercial tenants, especially in retail spaces. Tenants may request signage that enhances their business’s visibility and attracts more customers. This includes requests for monument signs—freestanding signs located by the main entrance, which display tenant names.
To avoid misunderstandings, outline the types and placement of signage allowed, any associated costs, and the approval process for signage changes. Clarifying these points helps set clear expectations and minimizes the chances of signage disputes down the line.
4. Plan for Parking Needs
Parking can be a make-or-break factor for many commercial tenants, particularly if they operate in sectors where customer or employee parking is essential. If your property has parking facilities, specify how many parking spaces are allocated to the tenant and whether they’ll be dedicated, shared, or restricted in some way.
Tenants might want assurances that their customers and staff will have access to convenient parking, so being clear about parking terms in the lease will prevent parking-related issues in the future.
Are you thinking about purchasing a new commercial property? You should understand how commercial leases are transferred to new owners. Learn more.
5. Consider Future Expansion Options
Some tenants may request a first right of refusal to adjacent spaces if they’re considering future expansion. This means they’d have the option to lease additional space before you offer it to other potential tenants. Granting this right can strengthen tenant relationships and encourage long-term commitments, but it also limits your leasing options for neighboring spaces. If you choose to offer a first right of refusal, define the terms clearly in the lease agreement, so there’s no ambiguity later.
6. Establish Subleasing and Assignment Terms
If your tenant’s business grows or changes, they may wish to sublease part of the space or assign the lease to another party. Define your position on subleasing upfront — whether you’ll permit it, require prior approval, or prohibit it altogether. Allowing subleases could benefit both parties in some cases, but it’s essential to maintain control over who occupies your space. Outline conditions for subleases or assignments in the lease agreement, such as requiring the subtenant to meet certain financial criteria or approving any significant alterations to the property.
7. Ensure Clear Language on Like-Use Restrictions
Tenants often ask for exclusivity in their industry to avoid competition within the same building or complex. For example, a coffee shop tenant may request that no other coffee shops operate within the same shopping center. These like-use restrictions can appeal to tenants but can limit future leasing opportunities. If you agree to restrict like uses, clearly define the boundaries and any specific conditions in the lease. Failing to outline these conditions may lead to misunderstandings and conflicts with future tenants or even legal challenges.
8. Establish a Maintenance and Repair Agreement
One area that often causes disputes between landlords and tenants is maintenance responsibilities. In your commercial lease agreement, clearly delineate which party is responsible for which maintenance tasks, including who will handle repairs to:
- HVAC systems
- Electrical and plumbing
- Structural repairs
- Exterior maintenance, such as landscaping and snow removal
Make sure these responsibilities are detailed and agreed upon by both parties to avoid future conflicts.
9. Outline Default and Termination Terms
While you hope that every tenant will be a good fit, it’s essential to plan for the possibility of a tenant defaulting on their obligations. Include terms in the commercial lease agreement that outline what constitutes a default, the notice period required for corrective actions, and the steps you’ll take in the event of termination. You might consider specific penalties, such as fees, for breaching particular terms of the lease. Covering these bases helps protect you as the landlord if things don’t go as planned.
What Are the Most Common Questions Tenants Ask?
Understanding the questions prospective tenants are likely to ask will help you craft a commercial lease agreement that addresses these concerns upfront. Here are a few questions tenants commonly ask:
“Can I get any concessions like reduced rent or a tenant improvement allowance?”
Address this in the lease agreement by specifying any temporary reductions or allowances, if applicable, and the conditions attached to them.
“What are the signage options?”
Tenants often look for visibility through monument signs or other signage. Define what is permissible under the agreement and include the approval process for signage requests.
“Will my business have dedicated parking?”
Parking is a frequent concern, especially for retail and customer-heavy businesses. Address whether parking is allocated, shared, or subject to any restrictions.
“Do I have a first right of refusal on adjacent space?”
Tenants with growth potential may want the option to expand. Be clear in the lease if you offer this right and the terms attached to it.
“Am I allowed to sublease the space?”
Clarify your position on subleasing in the agreement, whether it’s allowed, requires approval, or is prohibited.
“Are there restrictions on like use in the same center?”
Tenants might request exclusivity to avoid direct competition. Include any like-use restrictions clearly in the lease terms to prevent conflicts with future tenants.
How a Commercial Lease Attorney Can Help
Commercial lease agreements are complex and legally binding, so seeking legal guidance before finalizing the lease can help protect your interests. A skilled commercial lease attorney will carefully review your agreement, ensuring it includes all necessary protections for you as a landlord and complies with local laws. They can offer insights into industry standards, customize terms based on your unique needs, and help you avoid potentially costly pitfalls.
At Belkin Burden Goldman, we understand the complexities landlords face with commercial lease agreements. Our team can assist in drafting, reviewing, and negotiating lease terms to ensure a smooth and successful leasing experience. Whether you need advice on concessions, signage, subleasing, or other terms, we’re here to help you make informed decisions that support your business goals. Partnering with an experienced attorney will give you peace of mind and help you establish a fair, balanced commercial lease that benefits both you and your tenants.
By thoroughly reviewing your commercial lease agreement and working with the right professionals, you’ll be prepared to enter into leases that provide long-term benefits and protect your property’s value. Taking the time to address these details can set you up for successful landlord-tenant relationships and help you manage your property efficiently.
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Ready to navigate your next commercial lease with confidence? Discover how Belkin Burden Goldman’s seasoned attorneys can help you secure fair terms and safeguard your interests in any leasing agreement.