8 min read

Understanding the Terms of a Commercial Lease Agreement


Bruce Burk
Business Consultant and Corporate Attorney
Contributor
signing a commercial lease contract
shutterstock

Any good businessman needs to have a basic understanding of certain aspects of the law to get by. Sure you can hire a lawyer, but as a sophisticated businessman, you need to have a basic understanding of the law yourself so you can effectively manage your in-house or outside counsel in important business transactions. One type of a contract that many businesses will be involved in is a commercial lease and you want to review the lease template that was used to make sure it contains the appropriate clauses.

Parties

The beginning of a commercial lease will contain the names of the parties that are involved in the contract. The parties can be identified as either real people or legal entities, such as a Limited Liability Company, Partnership, or Corporation. It is important to note that if you have a business, you should have it enter into the lease agreement or you may become personally liable under the lease. This section will likely also identify the business address of any individuals or companies listed.

Premises Clause

The Premises Clause is the part of the lease that will describe the actual space occupied by the tenant. This section will describe the exact locations that you as a tenant will occupy. Many commercial spaces will have common areas that you are entitled to use but the landlord is responsible for maintaining. Parking locations may also be described here. The particular area that you are leasing is important because those are the areas that you will be liable under tort and workers’ compensation cases, should one of your employees or customers be injured while on your premises. You should review this section in line with the improvements and alterations clause to make sure you understand which party is responsible for maintaining certain areas.

Use and Exclusive Clause

The Use Clause lists how the property is going to be used. If your business requires a license, this clause may contain conditional language that the business may only occupy the premises subject to proper licensing. It may also contain conditional language that the use is subject to compliance with any other laws and regulations.

Whereas the Exclusive Clause will lay out the terms that the landlord agrees that he will not rent to anyone else of a similar type of business. This is important because if a competitor decides he wants to set up a shop just a store away from you, that is going to hurt your sales. That is why you want to make it very clear the specific type of business that you are and the specific type or goods or services that you will sell. Lawyers can get very clever to distinguish these clauses and if they come with enough money your landlord could side with them.

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Term Clause

Any good lease is going to have a Term Clause in it that specifies the time period of the lease agreement. Every lease should have a proper start date and end date. This section will contain a commencement date which is the date that you may officially begin conducting business. The date that you begin may correspond to when you take liability for any conduct on the property as well as when any insurance that the lease requires you to purchase kicks in.

There are two main types of lease terms. A Tenancy for years is a lease for a fixed period of time, such as one year or more. A period tenancy or month-to-month tenancy is a lease type that runs for successive periods that are usually short until the tenant notifies the landlord he wants it to end.

Rent

The rent clause will lay out the amount that tenant needs to pay. This will include late fees or other penalties for failing to fork over the money on time. If you are part of a lease within a mall or other place for stores, this clause may also contain language that requires you to pay a percentage of your sales to the landlord. If it does, try to negotiate the contract so that you are not required to make guaranteed payments in case your sales fall short, especially if you are a seasonal business that experiences drops in sales during parts of the year.

Security Deposits

The security deposits section is crucial to be looked at before you sign. This section will specify the amount you need to pay up front and what the landlord can keep if you decide to trash the place. State law has specific rules for claiming security deposits and if they do not use an attorney, chances are they will not follow them. If your landlord does not follow the rules--such as by not giving you proper notice that they will claim your security deposit--you may have the potential to sue and make them pay your attorney fees. Sometimes, commercial lease companies will allow you to use a letter of credit in lieu of actual payment for your security deposit. Also, with proper negotiation and business savvy, you may be able to negotiate the waiver of the security deposit by the landlord if you can convince them you are going to bring a lot of business to the area.

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Improvements and Alterations

The Improvements and Alterations Clause will tell the parties who is responsible for decorating and making improvements on the real estate that is the subject of the lease agreement. Whether you have a restaurant or a retail store you need to decorate the interior to help attract customers. Make sure to review whether certain improvements become fixtures- which is property that if attached to real estate, becomes affixed to the real estate itself and may not be removed when you leave the property. If you are entering into a lease with a building that is not completed yet, make sure that you do not have to pay your landlord full price if there are still repairs needed after construction has completed.

Maintenance, Utilities, and Code Compliance

The Maintenance, Utilities, and Code Compliance sections are also important to understand. Maintenance will address the landlord’s ability to enter the premises and do things like check the fire alarms, change air filters, repair the hot water heater, etc.

The Utility section will tell you if you are responsible for paying the power bill, trash, the internet, or other services or if it is provided by the landlord and encompassed into your rent.

The Code Compliance section will tell you that you need to comply with certain local ordinances and municipal codes. This usually has to do with getting signs on your building approved, not painting the premises strange colors, keeping trash cleaned, or not posting any politically incorrect materials out in public. Failure to abide by these codes can result in fines or a lien placed on the property which your landlord will not be happy about.

Parking, Signs, Landlord Entry, and Security

The Parking Section of the lease will tell you if there are specific spaces reserved for the members of your business or if it is more of a first come first serve arrangement. Again, watch to see if the landlord maintains the parking lot or if you do because that can determine liability. With regard to landlord entry, you want to make sure that the template requires the landlord to give you notice anytime they want to enter your property, so as not to disrupt your business activities. They oftentimes has the right to enter the property if there are hazardous materials on the property or to stop something like water damage from occurring. On that note, the lease should also specify what type of security, if any, you will have. If you have valuable inventory or equipment, you want it to be clear who is responsible for hiring guards or security systems because this could also come into play if there is vandalism or theft of your business.

Insurance Clauses

Insurance clauses in contracts will tell you how much money you have to fork over to the insurance companies. Typically, the first insurance you may be required is renter’s insurance. This will cover damage to the property. You may also be required to purchase other kinds of liability insurance depending on the risk involved in your particular business. You may be also required to purchase rental interruption insurance to compensate the landlord should you choose to violate the lease. You may also need general liability insurance to deal with any individuals who come into your business and hurt themselves.

Other Clauses

I will now comment briefly on some other clauses that are in commercial leases. The Termination Clause is something that you want to look closely at. These sections will usually deal with you paying rent until they find a new tenant or paying a lump sum penalty if you break the lease early. Attorney Fee sections deal with who has to pay if you and the landlord get into a dispute. You want to make sure your template has a provision where both sides split the attorney fees. Disputes sections will deal with what happens when you and the landlord get into a disagreement.

Many commercial leases will require you to waive trial by jury and submit the matter to either mediation or arbitration. There may also be a governing law provision in your lease that deals with what state law applies in a dispute. If the property goes into foreclosure, the template should include provisions that the lease is voidable at the right of the tenant because if the landlord gets foreclosed on, the new owner may be able to kick you out. Also, watch to see if the lease allows you to assign or sublet the property if you decide that part of the space will not be used for a substantial period of time.

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Bruce Burk Business Consultant and Corporate Attorney
Bruce Burk is an experienced business consultant and attorney who's worked for billion dollar companies. He has acted as a consultant to many companies creating business plans, finding seed money, creating marketing campaigns, developing corporate strategies, and creating a plan for businesses to grow. As an attorney, Bruce specializes in business litigation, corporate, and real estate law. He helps structure new companies, negotiate contracts, and protect his client's interests.
Bruce Burk is an experienced business consultant and attorney who's worked for billion dollar companies. He has acted as a consultant to many companies creating business plans, finding seed money, creating marketing campaigns, developing corporate strategies, and creating a plan for businesses to grow. As an attorney, Bruce specializes in business litigation, corporate, and real estate law. He helps structure new companies, negotiate contracts, and protect his client's interests.

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