Entering into a commercial lease is rarely a temporary decision. Further, being locked into a lease that doesn’t work for your business can result in a struggle that could lead to unintended costly outcomes. Due to the long-term nature of the agreement, listed below are some key terms that landlords and potential tenants should consider before entering commercial leases.
- Term: For long-term business locations, tenants should ensure the initial term of the commercial lease is long enough to make the investment in the space worthwhile. Landlords will need to balance the potential of a reliable long-term occupant with the interest to not be locked into an unreasonably low rental rate for an extended time without renegotiation. It is important that if the parties have agreed to renew the lease at the end of the current term, the process and timing of this renewal is set out clearly in the lease so there is no uncertainty. The lease should also be direct about whether any terms of the lease will be modified on renewal and how rent re-negotiations are to be handled.
- Rent: Rent obligations will differ depending on whether the lease is a ‘gross’ lease or a ‘triple net’ lease. Under a gross lease, the Landlord will pay all expenses associated with ownership (utilities, insurance, repairs, and some taxes) and charge the tenant a fixed amount of rent. Under a triple net lease, in addition to the fixed rate, the tenant also pays the landlord what’s often referred to as additional rent based on the tenant’s estimated proportionate share of taxes, insurance, utilities and maintenance for the year, which is usually readjusted annually. Specific terms about what type of rent is payable and how this will be calculated and collected are central considerations in determining whether the lease will make financial sense to the parties.
- Quiet Enjoyment: It is an implied term that in exchange for compliance with the terms of the commercial lease, the landlord will grant the tenant use and quiet enjoyment of the premises. However, this can be limited by conditions and exceptions that both parties should understand. Landlords will want to ensure their right to enter, inspect, repair etc. are reasonably excluded here and tenants will instead want to protect this right as much as possible to avoid disruption of their business. Recognize what will constitute a breach of this term, so that it can be corrected or acted on immediately as necessary.
- Assignment: If there’s a chance that ownership of the business may change during the lease, it becomes significant for both parties to know when and how an assignment of the lease can occur. The landlord’s right to assign is commonly unconditional, whereas tenants usually have outright restrictions or consent requirements prior to assignment. Additionally, it becomes important to know whether the assigning party will remain responsible under the lease despite the assignment or whether the request for the assignment could trigger the termination of the lease.
- Arbitration: Often in an attempt to increase clarity about how disputes will be handled, the use of arbitration clauses allows for alternative dispute resolution. It is unfortunately common that in otherwise standard commercial leases there are extensive arbitration terms that far exceed the realistic approach to disputes under the lease. Failure to modify these terms could be an expensive error, so careful consideration of the process is important.
- Other Important Terms: Obligations concerning repairs and environmental restrictions should be clarified. It is highly recommended that the insurance provisions of the lease are reviewed by the parties’ insurance broker to ensure appropriate coverage. If the location’s appeal relies on being the sole business of that type in the area, consider negotiations around exclusivity terms. If a landlord may need to demolish some or all of the leased premises during the lease, an explicit demolition clause should be included allowing for termination without breach or expiry of the term; whereas tenants should be satisfied that adequate notice will be given to allow for relocation. If the parties determine the tenant will have the right to purchase the leased premises if the landlord decides to sell, right of first refusal terms should carefully outline the process to follow.
If you are entering a new commercial lease or looking to update your existing form of lease, the team at Pihl Law can help you to review, understand, negotiate and finalize your lease.The information provided above is for educational purposes only. This information is not intended to replace the advice of a lawyer or address specific situations. Your personal situation should be discussed with a lawyer. If you have any questions or concerns, contact a legal professional.