Consider These Five Points When Negotiating a Commercial Lease
October 28, 2015 | dehs
Location. Location. Location. We have all heard the old adage. It rings true whether you are exploring investment in ownership of commercial property or are looking to rent commercial space for your business.
Negotiating and enforcing commercial leases will be a key component in your success. Landlords and tenants have different interests to protect as they consider the following negotiating points.
Note: This list is catered toward a multi-tenant facility, such as an office building or retail strip mall.
Rent: There are a number of factors to consider in establishing rent, including location, visibility, age of premises, quality of construction and finish, and access/parking. Rent is typically calculated on a gross or triple net basis. Gross rent includes all rental expenses into one flat rental rate, while tenants under triple net leases pay base rent plus common area maintenance, insurance and real estate taxes based on the pro rata cost of such expenses passed through to the tenant. You should be prepared to identify benefits and risks of each based on your position as landlord or tenant.
Term: Landlords and tenants may have different motivations in negotiating a shorter term or longer term of the lease. For example, a landlord may want a longer term lease to know the rental space will be occupied, but a tenant may want a shorter term lease for flexibility if the business fails or successfully outgrows the space. Longer term leases may include rent escalators to increase rent over time based on a set percentage or some factor of the Consumer Price Index established in the lease.
Common Areas: Both landlord and tenant want to be sure the lease details who is responsible for maintenance and upkeep of common areas such as sidewalks, parking areas, shared entrances and hallways. The lease should also clarify who is responsible to pay for the costs of such work.
Maintenance and Repairs: Every lease should address which party is responsible for maintenance and repair of the building, interior finishes, and equipment and infrastructure servicing the premises.
Termination: It is important to include express provisions in a commercial lease regarding prior notification to the other party of a default and providing an opportunity to cure a default. One obvious example of default under a lease is tenant’s inability to pay rent when due. Upon notice from landlord, if tenant’s failure to pay rent continues, the lease should indicate landlord’s recourse, including landlord’s ability to terminate the lease, evict the tenant, and/or accelerate payment of rent. An acceleration clause allows the landlord to claim all amounts due under the lease through the end of the lease term immediately upon default.
Entering into a lease is one very important step in successful growth of your business. The foregoing is not an exhaustive list of considerations, so do not hesitate to rely on professionals such as commercial realtors, attorneys, and accountants to assist you on your path to success.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the state’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.