Commercial leases are a fundamental part of how many companies do business. Companies that do not want the complications or commitments involved in owning property often lease space instead of buying it, especially in dense cities. However, while commercial leases offer more flexibility, they still impose restrictions on the company leasing the space. If you are considering entering a commercial lease, understanding how these contracts work and what to expect is in your best interest.
What to Expect in a Commercial Lease
A commercial lease is a rental agreement between a landlord, the lessor, and a company tenant, the lessee. The lessor agrees to permit the lessee to use a particular space for specific business purposes for a set period in exchange for the lessee paying regular rent.
The general structure of a lease is comparatively standardized. However, the specific terms of these leases can vary significantly depending on the location, the lessee’s needs, and the lessor’s expectations. When reading through the contract, you can expect the following sections:
- Location: The property site you are leasing, including all areas you are permitted to use.
- Rent: The amount you are obligated to pay and the schedule for these payments. You may pay rent monthly, quarterly, or even annually for long-term leases.
- Term: The length of the contract. Many commercial leases have terms longer or shorter than one year. Pop-up stores may have leases of just one month, while restaurants or long-established offices may have leases of five years or longer.
- Operating expenses: Leases may be “full service,” in which the lessor pays all operating costs, or “net rent,” in which the tenant must pay some or all of the costs of taxes, insurance, and utilities.
- Security deposit: The amount the lessee is expected to provide the lessor as a good faith deposit to cover any damage done once the contract is over.
- Use clause: A description of how the lessee intends to use the property.
- Improvement allowance: The amount the lessor will spend to make improvements on a property for the lessee. “Build to suit” leases frequently have high improvement allowances, while leases on pre-existing office spaces and buildings do not.
- Alterations: An explanation of any change the lessee may make to the location and requirements for requesting permission from the lessor before making significant alterations.
- Assignment: Whether the lessee has the right to sublease the space to another party.
- Renewal: Whether the lessee has the right to first refusal for renewing the contract at the end of the term.
- Code compliance: A breakdown of which party is responsible for maintaining compliance with building codes, environmental codes, and the ADA.
Reviewing the contract with the help of an experienced business attorney ensures that you understand each of these components of the agreement and any others that may be involved before you sign it.
What to Consider Before Signing a Lease
In addition to understanding the terms of a commercial lease, you should consider your business’s needs and preferences. Understanding what rights and protections you want will allow you to determine whether negotiation is necessary or if you would be better served by a different space. Questions to ask while reviewing a lease include:
- How long do you want to commit to the space? Unless you are confident in the location and the lessor, it is often preferable to sign a shorter six- or twelve-month contract instead of a longer-term one that may not benefit your company.
- What changes may you need to make to the location? It is best for your business if the lessor pays for alterations you need to use the space. The more alterations a site needs to suit your business, the higher an improvement allowance you should request.
- How does the agreement assign liability? In many cases, liability for accidents and injuries on a property is assigned to the party responsible for maintaining it. Some leases place responsibility for maintaining the grounds on the lessee instead of the lessor, exposing your business to liability. Discuss your concerns with your attorney to ensure you understand how a lease may make your company liable in future lawsuits so you know the risks you’re taking on.
As with any commercial contract, it is crucial to understand your lease fully before signing it. At EPGD Business Law, we are dedicated to providing our clients with comprehensive legal counsel, including guidance and representation in commercial lease negotiations. Reach out to our expert commercial lease attorneys in Florida to learn how we can assist you with your next lease.