Law and Real Estate

Understanding a commercial real estate lease

August 31, 2016
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Have you ever read through a commercial lease, maybe just for fun? My guess is probably not.

Most business owners, at some point, will need to review and sign a commercial lease, and the entire process can be confusing and overwhelming. Before you sign a lease you need to have a basic understanding of what the lease will contain and the issues it will address.

Lease area: Does the commercial lease clearly define the space that you will be leasing? Seems obvious, right? Be sure the lease includes a street address, site plan and square footage of the premises. Make sure the space listed matches the space you are expecting to receive. Also, make sure that the leased space includes sufficient parking spaces and signage rights to allow you to operate your business.

Lease type: Be sure you are clear on what is included in the rental amount that you will pay the landlord. Leases fall into the following categories: gross leases, triple-net leases or somewhere in between. Unfortunately, not all leases will state which category they fall within. A gross lease typically is all-inclusive, meaning the tenant pays the landlord one sum and the landlord is responsible for payment of real estate taxes, insurance and maintenance expenses. Tenant utilities may or may not be included within a gross lease. In a triple-net lease, the tenant pays a set rental amount to the landlord but also pays a share of the landlord’s real estate taxes, insurance, maintenance expenses and building utilities.

Rental rate: Does your lease clearly state what your rate will be for the entire term of the lease? This is usually done through a chart that outlines the annual rental rate for each year and what the tenant’s monthly payments will be based on the annual rate. In most leases, the annual rental rate increases from year to year either by a flat amount or by reference to an exterior formula (i.e., in proportion to increases in the cost-of-living allowance). In some retail leases, the tenant is responsible for paying the annual rental amount plus a percentage of the tenant’s sales for the year, which is known as percentage rent.

CAM: Be sure to look at common area maintenance (CAM) expenses when reviewing the lease. CAM often includes costs of snow removal, security, parking attendants, building maintenance, building management fees, etc. A common method for determining a tenant’s share of CAM is to divide the number of square feet in the tenant’s space by the total number of rentable square feet.

Use of space: Office leases often state the space will be used for general office use and for no other purpose. Leases for retail spaces often get more specific. You need to know whether your lease includes an exclusive, which is a provision that gives you the exclusive right to operate your type of business in the building or retail space.

These are all important issues that must be reviewed carefully and understood by the tenant. Understanding different lease terms is particularly important when comparing multiple spaces because it helps to ensure you are comparing apples to apples.

Your best bet is working with legal representation to ensure your interests are protected. Spending the money up front will save you the headache down the road.

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