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What could be more fun to talk about than commercial leases? Although they may not be a hot topic of discussion, commercial leases are important contracts that affect many Hatters. Retail stores, industrial shops and restaurants are just a few industries where commercial leases are used. Whether you own and operate a commercial building or you are looking to rent commercial space for your business, I hope to provide you with some tips, tools and considerations for your commercial lease.
Unlike residential tenancies, commercial tenancies are not regulated by legislation. This means there are no basic, non-negotiable rights and obligations given to commercial Tenants and Landlords. The parties are free to negotiate their own terms and conditions. As a result, it is important for the parties to carefully consider and understand the terms, conditions and obligations of the commercial lease before signing.
For many businesses the biggest factor in lease negotiations is rent. Rent is often calculated based on square footage, but the Landlord may also require the Tenant to pay for a portion of the property’s operating costs. Operating costs can include property taxes, utilities, snow removal, landscaping, roof repair, etc. Here are some of the ways Landlords calculate and charge rent:
- A Gross Lease requires the Tenant to pay a flat monthly amount. The Landlord is responsible for the building’s care, maintenance and all operating expenses.
- A Triple Net Lease requires the Tenant to pay a base rent and to share in the building’s operating expenses.
- A Percentage Lease is often used in retail and requires the Tenant to pay a base rent plus a percentage of its annual sales.
The amount of rent is important, but other terms of the lease are significant too. You may also want your commercial lease to address:
- Insurance – Accidents happen. Mistakes happen. Make sure you are protected. Your lease should outline each party’s insurance responsibilities. Insurance requirements will vary depending on the nature of the tenancy. As a Landlord, you may want to ensure the Tenant has a minimum amount of public liability insurance ($2,000,000.00 is a standard coverage). The Tenant may want to ensure the Landlord insures the common areas of the property (lobbies, elevators, stairways, etc.)
- Dispute Resolution – What happens if there is a conflict and the parties cannot reach an agreement? Does the dispute have to be resolved in Court? To minimize costs, it may be beneficial to include a dispute resolution clause in the lease. The Landlord and Tenant can agree to use other forms of dispute resolution such as mediation, collaboration and arbitration.
- Renewal – If the lease doesn’t have a renewal clause, the Landlord has no legal obligation to renew the lease at the end of the term. It may be advantageous for both Landlord and Tenant to negotiate renewal terms.
- Sub-Lease – Can the Tenant sublet the space to another business? Does the Tenant require the Landlord’s approval?
- Leasehold Improvements – The Tenant may be allowed to make some changes or improvements to the rental space. If equipment or other fixtures are installed, who gets these items at the end of the lease?
Taking the time to do some thoughtful planning and negotiating before the lease is signed will save you time and money down the road. Our team at Pritchard & Co. can help you navigate your commercial lease. We can help determine what’s important to you in order ensure your interests are protected. We can provide you with options, help negotiate terms and prepare a lease that meets your needs.