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When negotiating a new commercial lease for your business, you may focus on terms like the rental price and the length of the lease. However, commercial leases frequently include the following clauses that can impose unexpected financial burdens on your business.
Triple-Net Leases
In a triple-net lease, a tenant agrees to pay all expenses for the leased property, including real estate taxes, building insurance, and maintenance costs, in addition to the usual costs of rent and utilities. Many commercial leases operate as triple-net leases. Although most triple-net leases have lower base rent because the tenant relieves the landlord of many of the financial expenses for the property, those expenses can place a damaging burden on a tenant’s business.
Operating Expense Escalation Clause
Some commercial leases may include an operating expense escalation clause, which allows the landlord to increase the rent during the lease term to offset increases in expenses to operate and maintain the property. As a result, the landlord receives the same “net” income from rent throughout the lease, while the business owner pays more. Escalation clauses may authorize the landlord to charge a tenant for its pro rata share of the property’s operating expenses. This is based on the tenant’s leased square footage in proportion to the total rentable square footage in the property.
Sublease/Assignment Restrictions
Commercial landlords may include lease provisions restricting a tenant’s ability to sublease or assign their leased premises, such as requiring the landlord’s approval for any sublease or assignment. However, tenants may find these restrictions unduly burdensome if the space becomes unsuitable for the tenant’s needs. For example, a business may downsize and find itself with excess space, or it may need to relocate for various reasons.
Exclusive Use Clauses
Leases for retail properties frequently include exclusive use clauses. These clauses identify what a tenant intends to use its leased premises for and restrict other tenants at the property from engaging in a similar use. For example, a tenant operating a steakhouse in a shopping center may have an exclusive use clause that allows only that tenant to operate a steakhouse in the center. However, exclusive use clauses can restrict the number of properties a business can move into when some properties already have tenants engaged in a similar business. Exclusive use clauses may also restrict an existing tenant from changing its business to one already conducted by a neighboring tenant.
Renewal and Termination Provisions
Businesses negotiating leases for commercial space should also pay attention to the lease’s renewal and termination provisions to understand their rights and obligations regarding renewing or ending the lease. A business does not want to get caught having its lease expire because it failed to submit a timely renewal request. The business should also know the process for terminating the lease if it needs to relocate or wind down.
Maintenance and Repair Obligations
Businesses should also know what maintenance and repair obligations a prospective commercial lease will place on them. Understanding the cost of leasing space requires knowing what maintenance and repair costs the business should expect to incur. When something breaks in the property, does the tenant business have a responsibility to fix it, or can the business turn to the landlord to cover those costs?
Liability and Indemnification Clauses
Businesses should also review their leases’ liability and indemnification provisions. For example, does the lease make the tenant or landlord responsible for maintaining the property’s parking lot? If someone slips or trips and falls due to a hazard in the parking lot, who bears liability for the accident? Liability and indemnification clauses may place financial liability for any incidents at the property on the tenant. Finally, these clauses may also impose insurance requirements on a tenant, including obligating the tenant to name the landlord as an additional insured on the tenant’s policies.
Contact a Commercial Real Estate Attorney
Experienced legal counsel can help you negotiate favorable terms in your business’s commercial lease. Contact LaFountain & Wollman P.C. today for an initial consultation with a real estate lawyer to discuss your business’s legal options.