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Commercial Lease Basics

December 28, 2014

For those that own their own businesses, it is likely that the business will need to enter into a commercial lease at some time during the life of the business. It is important to have a good understanding of what the issues are at the heart of any commercial relationship.  Here is a partial list of some of the more pressing issues to consider:

How is the rent determined?
A commercial lease should clearly define the rental rate.  This can be done through a standard charge with an annual rate increase that is clearly defined (annual rate increases should be defined by a flat amount).  In some retail leases, a tenant is responsible for paying some percentage of the tenant’s sales per year.  It is important to know if this is being required.

What is included in CAM?
Many have heard of the term “Triple Net Commercial Lease”.  This implies that the tenant is paying for all its costs including, common area maintenance, real estate taxes, utilities, etc.  Common area maintenance or “CAM” includes things like the cost of snow removal, security, building maintenance, management fees, landscaping, etc.  The simplest method for determining a tenant’s share of CAM is to divide the number of square feet of the tenant’s space by the total number of rentable square feet in the office building or shopping center.  Sometimes commercial landlords try to manipulate this amount so that the tenant will be paying the highest cost possible.  It is important that this be reviewed carefully.

When something breaks does the business have to fix it?
A well-drafted commercial lease will clearly define who is responsible for repairs, the building, the parking lot, the core building systems (plumbing, electric, HVAC, etc.).  There is a difference between who pays for the repairs and who is responsible for making sure that the repairs are made in the first place.

Does the business require build-out and, if so, who pays for it?
Again, most commercial leases will require that there be some modification or alteration to the existing premises and this is known as “Build Out”.  A business tenant should always set forth in detail what build-out is to be performed, how it will be paid for (how much of an allowance will the landlord provide), and how long will it take for the improvements to be made.

What space is the business leasing?
It is important to make sure that the appropriate amount of space is being rented.  This can be done by measurements (it should be verified) and any business should make sure that the premises described in the lease match the premises that the business is expecting to receive.  A business should also make sure that there are sufficient parking spaces if needed and sign rights in order to allow the business to advertise its location.

The foregoing are just a short list of some of the things that should be considered.  Most commercial leases deal with many other issues including the length of the lease, the tenant’s ability to extend or renew, the ability to assign, and what constitutes default.  These are all extremely important issues that should be reviewed carefully and understood before entering into a commercial lease since it is normally a long-term commitment of time and money.