Five Essential Elements of a Commercial Lease Agreement

If you’ve never been involved in renting commercial space, your first review of a commercial lease may be overwhelming. They are lengthy, full of legal jargon and unfamiliar terms, and written to the landlord’s advantage. It is important to know that they are negotiable.  The key to successfully negotiating a lease is knowing what you want, understanding what the lease document says and being reasonable in your demands. Because commercial leases involve a commitment to a large amount of money, it is best to leave these negotiations to an experienced commercial real estate attorney.  This one piece of advice can save an individual or company thousands of dollars or more. While there are many complexities involved, here are 5 basic elements to look for in a commercial lease agreement.

1. Parties Clause 

Every commercial lease agreement should contain the complete and accurate names of the landlord and tenant. In the tenant’s place should be the full legal name of the business, as well as its designation (for example LLC, LLP, Corporation, etc.). If the business has not been established yet, you must provide a proper identifier for the lease to be enforceable.

2. Premises Clause 

You must correctly identify the commercial property being leased. If the business plans to occupy an entire building, you could simply put down a street address. However, if you will just be using a room or office, you need to describe that space as well as any other areas that you will be using, e.g. conference rooms, storage rooms, kitchens, and parking. The lease should also explain how to identify premises that are under construction, once they are completed. 

3. Rent Clause

The commercial lease agreement must clarify the monthly rent, along with any other expected expenses. In most cases, there are two components in the rent clause: base rent and percentage rent. The former is calculated per square foot while the latter is basically a percentage of the business’s gross sales. Sometimes the rent could also include tenant improvement allowances and common area expenses. However, there should be a clear explanation of how these figures are calculated for the clause to be legally binding. 

4. Term Clause 

This element contains the beginning and ending dates of the commercial lease. Additionally, it specifies rent due dates and when certain events regarding the business will happen, e.g. business launching and insurance. If you are unsure about the opening date when signing the agreement, you should specify how to determine when the business has commenced (e.g. 60 days after receiving notice that the premises are ready for occupancy).  Bailout options should be considered when leasing retail space. Bailout options allow for you to opt out of the lease if your business fails to achieve a certain amount of sales. Consideration also needs to be given to a co-tenancy clause in the event that an anchor business in the same premises exits or becomes bankrupt. Being aware of crucial term clauses requires an experienced commercial real estate attorney that represents your interests.  

5. Use Clause

As the name suggests, this part of the commercial lease agreement details exactly how the premises will be used.  You want to make sure this is clearly defined. Items to detail include: 

  • Type of business 
  • Products or services offered 
  • How the space will be used 

The importance of having an attorney review your commercial lease agreement and represent your interest cannot be overstated. Carlos Reyes has more than 30 years experience in Real Estate and has negotiated numerous commercial leases for his clients.  Contact Reyes Law Group today and we will be more than happy to review and handle your transaction. 

Written by Reyes Law Group