A commercial real estate lease, like any other contract, can be negotiated. The idea is to avoid ever using a form document and, instead, come up with a custom lease that provides your business with maximum legal, economic and tax advantages.
Before signing a lease, your business needs to understand the terms and their legal and tax implications. Here are some key terms leases should contain to help ensure the rights of your business are adequately protected:
Certificate of Occupancy: The lease should state that your business can move in and start paying rent as soon as a Certificate of Occupancy has been issued. The premises should meet agreed specifications and plans, with only minor details of construction, decoration or mechanical adjustments needing completion.
Delayed Possession: Terms should outline remedies available if, through no fault of your business, there is a delay in possession. Remedies could include rent abatement, money damages, cancellation or reimbursement of prepaid deposits.
Rent Details: The amount and type of rent should be described. Typical terms are:
- Flat rent;
- Step-up rent (gradual increases);
- Percentage of gross sales; or
- Base rent plus percentage of net sales.
In some cases, renters also use an “expense-participating lease,” which means they pay a fixed rent plus a share of real estate taxes, insurance and certain repairs.
The lease also should note that rent will periodically be raised and specify how the increase will be calculated. Typically rent increases are based on:
- Operating expenses (pro rata share);
- The Consumer Price Index (CPI); and
- Fixed percentages with a cap.
Utilities and Other Costs: Provisions should specify who is responsible for providing and paying for heating, ventilation, air conditioning, electric lighting, water, janitorial services, security and snow removal. The lease should also include details about your company’s right to remove fixtures and make alterations and improvements at its own expense.
Warranty: The landlord may want to include a statement that any use, storage, treatment or transportation of hazardous substances on the premises must comply with all federal, state and local laws, regulations and ordinances. In addition, the landlord should include a warranty that no release, leak, discharge, spill, disposal or emission of hazardous substances has occurred on the premises.
It is generally a good idea to include a statement about the presence of any hazardous substances on the premises before your business took occupancy or that the landlord placed there as part of a renovation.
The landlord should agree to indemnify and hold your business free from claims, damages, fines, judgments, penalties, liabilities or costs incurred because of an investigation of the site or a clean up, removal or restoration that is ordered by federal, state or local agencies.
The terms of leases can be complex but are necessary to protect the interests of both parties. Do not sign a lease or any contract without consulting with a professional.