As the business cycle ramps up, there is a pretty good chance you could be looking for a new business facility and entering into a commercial lease. Each lease is different and has to be reviewed carefully. When that time comes, you should have a basic understanding of the basic issues of leasing.
1. Exactly what are you leasing? “Demised premises” is the term used to describe what is being leased. The description should include a street address, with suite or unit number if appropriate, and a site plan. Be sure to confirm the demised premises you think you are leasing matches what is shown on the site plan. Be sure to clarify how many parking space you are entitled to, as well as signage, and make sure the HVAC is in a condition you can purchase as a service agreement from a licensed contractor at the time of lease commencement, if you will be responsible for its upkeep. Understand the difference between rentable and useable space to be able to compare apples-to- apples.
2. Having a Transaction or Real Estate Attorney review the proposed lease, once you have a signed Letter of Intent or Term Sheet is advisable. You might ask, “But shouldn’t we be able to rely on our advisors in such an instance?” In our experience, tenants often involve their attorney far too late in the negotiation process to be 100% effective. When issues arise late in the negotiation, the landlord will often feel that the tenant is attempting to re-trade the deal and become resistant to making change that are detrimental to the Landlord’s position.
3. What type of a lease is it—a gross lease, a net lease, or something in between? A gross lease typically includes common area maintenance (CAM), property insurance, and taxes without additional management fees. A net lease, or something in between, is the base rent, plus these additional costs. It is important to know what these additional CAM costs will be. To find out, ask what these costs were last year, and what they are in the current year. If there are management fees, you will want to determine if there is a cap on annual increases. You will also want to determine if the CAM fee is prorated based on the costs of the entire property being fully occupied, so the CAM allocation should be reviewed carefully. You will want to establish who pays for utilities and trash pickup, and that it is stipulated in the lease. Also, be aware that, in Florida, the state collects sales tax on commercial rental property.
4. What are the take-possession date, move-in dates, and rent-commencement date? With some commercial properties, the landlord may allow you a period of time to complete a build-out or site preparation once the lease has been signed. Pay attention to the take-possession, move-in and rent-commencement dates.
5. How is your rental rate determined? With most commercial leases, the rent to be paid is shown with a rental chart for the term of the lease, showing the cost per square foot, monthly rent, and total annual rent for each year. In most commercial leases, rent increases on an annual basis. You may want to consider negotiating a cap to the annual rate increase if a specific amount is not specified. With some retail leases, the leaseholder is responsible for paying an annual rental amount plus a percentage of the tenants’ sales for the year. This is known as percentage rent.
6. What can you do in the demised premises? A commercial lease is likely to state what you can and cannot do in the demised premises. With office space, it will typically state that use is for general office use, and no other purpose. With retail space, it will typically be more specific, and may state that it is or is not “exclusive.” An exclusive is a provision that no other like business will be allowed to operate in the building or shopping center.
7. Who is responsible for what? A commercial lease needs to state who is responsible for what repairs to the demised premises. Items such as the building, roof, parking lot, and core systems should be identified, as well as HVAC, plumbing, electric, etc. The question is not only who will pay for it, but who is responsible for making sure the repairs are made.
8. Will there be a build-out, who will pay for it, did you get your plan pre-approved? With most commercial property, some type of build-out is involved. It is important to have this specified in the lease, with who pays for it, or—as is more common—what the build-out allowance will be. It is always a good idea to include proposed leasehold improvements or build-out plans in the lease, to avoid misunderstanding. Be aware of American Disabilities Act requirements (ADA) and who is responsible for making sure the demised property is in compliance.
9. Will your business require special zoning? Depending on the type of business you will conduct at the demised premises, it may require special zoning. Compliance with zoning laws should be verified.
This list will provide some guidance when preparing to enter into a commercial lease agreement. Commercial leases can involve a variety of other issues as well: the term of the lease, including tenant options to renew, tenant’s ability to assign or sublet the demised premises, what constitutes a default and what remedies are available for a default, environmental contamination, insurance obligations, etc. These are all important issues and must be reviewed carefully and be understood by the tenant before you sign the lease.
When it is time to find a new location to lease for your business, let us help with offices, industrial, warehouses, showrooms, retail, restaurants, and fast-food or franchise expansion. Contact Robert “Bob” Dolan at 888-893-6661 or firstname.lastname@example.org.