Elements of a commercial lease

Elements of a commercial lease

When negotiating a commercial lease, there are certain elements that should be included in order to protect the interests of both landlord and tenant. These include items such as: rent amount and frequency, length of the lease, use of the premises, repairs and maintenance responsibilities, renewal options, and penalties for early termination. Understanding these key provisions can help you negotiate a fair deal for your business.

Rent amount and frequency

Landlords of commercial property generally seek monthly payments from their tenants. However, monthly rent is not always required. For example, it can be paid on a bi-weekly basis or quarterly in some cases. The landlord should confirm the payment schedule at the beginning of the lease term to minimize any confusion later on.

Length of lease (lease term)

Typically, a commercial lease is written for at least three years with an option for renewal; however, there are usually ways to break the initial lease before this time expires. There are two common options:

1- Early termination provision

A tenant may find that after 12 months (or other predetermined time period), he is paying far too much rent for the area. In order to break this lease early, the tenant must compensate the landlord in some way. Typically, this is done with a provision that requires the tenant to pay all remaining rent due under the current term of the lease and an additional sum representing his share of any unamortized costs paid by the owner for capital improvements while he has been in possession.

2- Option to terminate

Landlords may consider including a clause giving them an option (exclusive or non-exclusive) to terminate. This would allow, for example, a landlord who sees retail space on its property deteriorating from disuse over time to notify the tenant at any during their lease that they are terminating the lease and taking back possession of the premises.

Use of the premises

The terms listed in this section describe use of a commercial property by a tenant, any limitations on how it may be used, and whether a tenant's use must comply with building codes.

It is important to note that land often has different zoning rules from those that pertain to buildings located on it. The city or local government regulates what can be built on its land-not what can be done with an existing building there.

In most cases, a retail business needs to show some flexibility so as not pose any restrictions which would make it impossible for them to run their business successfully. For example, a clothing store should have enough frontage to display enough clothing for window shoppers to be tempted to step inside.

Also, if the business is manufacturing or selling an unhealthy product (cigarettes, firearms), it may need special permission from local authorities.

Repairs and maintenance responsibilities

Landlords generally look for tenants who will take care of major repairs during the lease term. This includes all structural repairs as well as renovations necessary for compliance with building codes. This clause helps avoid disputes later over what was done properly and what wasn't (ex: painting).

If none of this is specified in the lease, any renovation necessarily performed by a tenant falls under his responsibility afterwards at his own expense. It is important that the parties understand each other's responsibilities especially when damage is caused by a fire, flood, or other natural causes.

Periodic inspections of the premises may be required to ensure that all repairs have been properly completed and that zoning rules are being complied with. In residential leases where tenants occupy individual units, landlords typically make the unit available for periodic inspection as needed during the lease term.

Renewal options

In many commercial leases, one major tenant will lease several contiguous floors from a single landlord. These situations create a need for one large tenant to pay for capital improvements that benefit the entire property. This is typically covered in a renewal clause which allows a tenant who renews his tenancy after his first term to share these costs with other on the property prior to its sale. This clause helps the larger tenants spread out their expenses and gives small tenants a chance to share in them too.

Renewal clauses may also be used to control tenant turnover by setting time limitations on when renewal must take place. The effect of this often makes it impossible for a tenant who has been there longer to renew at a later date, even if he wants to. In order for this type of provision not to violate the Landlord-Tenant Act, it should state that its intention is "to encourage continuity of leasing" and only be used in good faith.