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Signing a Commercial Lease

The most common commercial leases that a small business owner is likely to encounter are a commercial shopping center lease and an office building space lease.

Before beginning negotiation, the tenant must thoroughly review the lease to understand the meaning and significance of all of its provisions.

In reviewing the negotiating a lease agreement, the tenant should carefully review and consider the following issues:

The Lease Premises. An accurate description of both the interior space and the building of which the leased premises are a part is important. The tenant needs to know exactly what is being leased and what his or her rights are as to certain common areas.

Also, if a tenant is required to pay a percentage, or pro rate share, of real estate taxes and operating expenses of a building, how the size of the tenant’s lease space is determined definitely affects the tenant’s costs.

Tenant Improvements. When the landlord is to “build-out” certain tenant improvements on the leased premises, the tenant will want to have a detailed work letter attached to the lease. The work letter should describe, in detail, the work to be performed at the leased premises and at the landlord’s cost, and should also have a procedure for preparing and improving plans and specifications.

Term of the Lease. The commencement day of the lease needs to be defined. Renewal options may be important to a tenant, and careful attention should be paid to the specific provision concerning rent and other provisions which might change during a renewal option term. If possible, an early termination provision might be negotiated. For example, if the tenant fails to meet certain sales levels or there is a change in the tenant circumstances, early termination is possible at the tenant’s option (especially common in the medical building context).

Rent Escalators Provisions. Most long term leases have provisions for yearly increases in basic rent based on the increase in some independent index such as the Consumer Price Index. Even if the rent provision does not provide for increases in the basic rent, most leases have provisions that require tenants to pay a pro rate share in increases in real estate taxes and/or operating expenses.

Use Provision. If there is no use provision in the lease, then the general rule of law is that any legal use is permitted. The tenant will want a significantly broad use of the lease space so as to accommodate its current business and future changes in that business.

Maintenance and Alterations. The lease should allocate the maintenance responsibility between the landlord and tenant. In most leases, the tenant should only be responsible for routine maintenance and certain minor repairs but not replacement of certain components of the building, i.e., heating and air conditioning systems.

Assignment and Subletting. Again, this is an area where, on one hand, the landlord wants a restrictive clause prohibiting assignment or subletting by the tenant and the tenant should require that the landlord consent not be “unreasonably withheld or delayed.” The tenant needs to understand that in the assignment or subletting context, it will not be released from its original obligation by the landlord as a result of the assignment or subletting unless the lease clearly states otherwise.

Default Provisions. A tenant should, at a minimum, negotiate written notice of all lease defaults and a grace period so as to allow for a cure. If it is a monetary type default (rent, additional rent, or payment of money), generally a landlord should be required to give written notice and at lease a five (5) to ten (10) day grace period. If it is a non-monetary type of default, the tenant will want written notice and a reasonable time to commence and complete a cure.