Negotiating a Commercial Lease

A business can enjoy a healthy additional revenue stream by owning commercial property and renting out space to other companies. However, it’s important to remember that a commercial real estate lease, like any other contract, can be negotiated — something your tenants will likely let you know right away.

This is why you probably shouldn’t use a “boilerplate” lease. The contract should be constructed in a way to ensure you obtain the maximum legal, economic and tax advantages.

Keep in mind that any ambiguities in a commercial lease are usually construed by the courts to be to the legal detriment of the party who drew it up — which, in many cases, is you, the property owner.

To fully and adequately protect your rights, here are eight important considerations in a lease:

1. When can a tenant move in and start paying rent? Typically, this should occur only after:

  • A certificate of occupancy has been issued,
  • The premises are ready per specifications and plans, and
  • Only minor details of construction, decoration or mechanical adjustments remain to be completed.

2. If possession is delayed through no fault of the tenant, what are the remedies? They might include:

  • Rent abatement,
  • Money damages,
  • Cancellation, or
  • Reimbursement of prepaid deposits.

3. Rent should be stated as either:

  • A flat amount,
  • “Step-up” rent (a gradually increasing amount),
  • Percentage of gross sales, or
  • Base rent plus percentage of net sales.

In some cases, renters also use an “expense-participating lease,” which involves fixed rent plus a share of real estate taxes, insurance and certain repairs.

4. Periodic rent increases should be specified according to one of the following methods:

  • Operating expenses (pro rata share),
  • The consumer price index, or
  • A fixed percentage with a maximum cap on the increase.

5. Specify whether the landlord or the tenant provides and pays for electricity, HVAC, water, janitorial service, security, and landscaping and snow removal (if applicable).

6. Describe a tenant’s right to remove trade fixtures. What about alterations owned or paid for by the tenant, such as improvements made at the beginning of the lease?

7. Experts often advise including a warranty that any use, storage, treatment or transportation of hazardous substances on the premises is in compliance with all applicable federal, state and local laws, regulations and ordinances. In addition, consider a warranty that no release, leak, discharge, spill, disposal or emission of hazardous substances has occurred on the premises.

8. Should you include a statement about the presence of hazardous substances on the premises before a tenant takes occupancy? Many property owners agree to indemnify and hold harmless the tenant from any claims, damages, fines, judgments, penalties, liabilities and costs incurred because of an investigation of the site or any clean up, removal or restoration mandated by federal, state or local agencies.

These are only a few of the many issues involved in a commercial lease. Before creating or signing one, it’s important to clearly understand all of a lease’s provisions, as well as its broader legal and tax implications. To that end, be sure to engage a qualified real estate attorney and get input from your CPA.

Copyright 2023

This article appeared in Walz Group’s August 28, 2023 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.