Commercial leases are used when the lessee wants to run or operate a business. The business can be a for-profit business or a non-profit. Commercial leases differ from residential leases in that the signer of the lease is not using the location as a residence. Often, more legal protections are given to those who sign residential leases because having a place to live and sleep is one of life's essentials.
Commercial leases are used when the lessee needs a place to meet with customers or clients. They allow the business or organization to have an office space to work in away from home. Commercial leases can be used for stand-alone offices or for locations where multiple offices have private entrances but also common locations. According to Statista, there was nearly $87 billion in commercial real estate construction in the US in 2017.
The Basics Elements of a Commercial Lease Agreement
Unlike residential leases, commercial leases are often subject to less statutory regulation and afford the parties involved greater negotiation freedom.
Key elements in a commercial lease agreement include rent amount, lease duration, lease type (e.g., gross lease, net lease, percentage lease), rights and responsibilities of each party, and renewal options. These terms are crucial as they can significantly impact your business operations and profitability.
The key differences between commercial and residential leases
Generally, commercial leases:
- Are negotiated. Unlike apartment complex leases or other residential leases, the lessee (the entity renting the premises) has more ability to negotiate the terms of the lease. Most apartments are pretty much told – sign the lease or move to other locations. Commercial leases should be reviewed by experienced lawyers. Some terms of the lease can be modified or even deleted. Often, what applies to one commercial tenant doesn't apply to other tenants. Commercial leases are less standardized than residential leases.
- Have fewer protections. Florida makes every effort to protect residential tenants. Apartment owners need to provide habitable locations. There are specific legal timelines for attempting to terminate a lease. Florida has specific laws on how a tenant can be evicted, what a tenant owes after the eviction and security deposits. Commercial leases are generally based on the principle that lessees are in a position to obtain legal counsel and that leases can be negotiated. Then, tenants should understand that the rights and duties of the lessor and lessee are normally set forth in the written contract.
- The length of the lease. Most residential leases are year-to-year. Commercial leases can obligate the lessee for several years at a time.
- The status of the signors. Typically, a residential lease binds the person who will live in the apartment. Commercial tenants may want to sign their lease in only their business capacity, such as the business corporation, without personally agreeing to be liable if the rent can't be paid. Commercial landlords will usually seek personal signatures in addition to business signatures.
Key considerations commercial lessees should review with their attorney
A commercial lease is usually just one part of the lessee's business. The commercial tenant should work with lawyers who understand the nature of their business. Businesses should consider some of the following before negotiating or signing a lease agreement for a commercial space.
- The location. Many businesses survive or fail based on the location of the businesses. Even in the Internet age, businesses should be near suppliers, customers, and those that can refer them.
- Access. Commercial businesses need to make sure customers can easily enter and exit the premises.
- The rental terms. Often, rent is based on the amount of space, the square footage is leased. Lessees should try to negotiate this amount. Since commercial leases can bind the lessee for several years, the lease should be clear as to how much the lease increases year-to-year.
- The amount of space and the type of space. Professional services generally need room for their operations and customers. Bigger companies may need several floors, open space as well as enclosed space, and other space requirements. Retail businesses have unique space needs.
- The ability to modify the premises. It should also be clear that the business can make changes or improvements to the space – for communications, for a better work environment, for a better customer experience, and for other reasons. For example, a medical spa may need room for laser equipment and massages.
- The security deposit. This initial deposit provides a safety net for landlords, while for tenants, it represents a significant upfront cost. As with other elements of a business lease, this amount is typically negotiable, depending on the tenant's credit, the duration of the lease, and the market conditions.
Property taxes in a commercial lease
Property taxes are typically levied by local governments (city, county, or municipality) and are based on the assessed value of the property. The funds collected from property taxes are generally used to support local public services such as schools, parks, roads, and public safety.
In commercial leases, the handling of property taxes can vary significantly based on the type of lease agreement. Rent and property taxes can be managed via a gross lease, net lease, or percentage lease.
A gross lease will entail that the business tenant pays a fixed amount of rent, and the landlord is responsible for all property-related expenses, including property taxes and maintenance costs. In a net lease, the tenant will pay rent in addition to all expenses related to the commercial property, including taxes. A net lease may further be classified as a double net lease, triple net lease, and so on, based on which additional expenses are woven into the agreement. Finally, in a percentage lease, the tenant is obligated to pay a percentage of their business revenue on top of their base rent.
How a commercial real estate attorney can help
Having a commercial real estate lawyer by your side is vital when it comes to commercial leasing. Whether you're a landlord or a tenant, a commercial leasing attorney can help you understand the legal implications of your commercial lease terms and ensure that your interests are protected throughout its duration.
An experienced commercial lease attorney also reviews how a client will market their business to attract customers driving nearby. Signage is a common issue in many commercial leases. Often, a lessee wants to prevent the landlord from offering space to a company that will compete with yours.
Other issues an experienced commercial lease attorney reviews
- Common areas. If the lessee is sharing common areas with other tenants, then the responsibility for maintaining and improving those common areas should be set forth in the lease. Common areas include waiting areas as well as elevators, escalators, corridors, and other areas that allow a customer to get into the building and navigate the building.
- Parking. The rights and duties of the landlord to provide and maintain adequate parking for customers and supplies should be detailed.
- Maintenance and repair. It should be clear who has responsibility for the maintenance of common areas and the internal locations. Businesses depend on roofs that don't leak, plumbing and heating that works, and other services and needs.
- Termination clauses. It should be clear how the lessee and landlord can terminate the lease and the rights of each party on termination – including the right to the return of security deposits.
- Insurance. The duty to pay for premises liability insurance, building insurance, and other insurance should also be identified.
Other factors to review with a real estate lawyer include the ability to sublease the locations, how to handle disputes (arbitration, mediation, or litigation), and many other factors.
Reach out to a commercial lease attorney to learn more
Just as you would turn to an experienced guide when navigating unfamiliar territory, you need an experienced commercial leasing attorney when navigating the intricacies of commercial leasing. Our team of skilled attorneys is committed to helping you turn challenges into opportunities. Contact us for more information or to schedule a consultation today.