Avoid Costly Surprises by Understanding Key Legal Terms and Pitfalls Before You Sign
Although leasing commercial space may be a milestone for your business, it is also a legal undertaking that carries significant risks if not approached carefully. A commercial lease agreement is more than a standard formality. It is a binding contract that governs the rights and obligations of the landlord and the tenant for a term that could be many years. A well-written leasing agreement will protect business owners and landlords alike.
Before signing on the dotted line, business owners should fully understand the legal issues at stake and protect their interests accordingly. The following critical legal considerations should be evaluated thoroughly with the guidance of an experienced commercial real estate attorney.
Lease Term and Renewal Options
The duration of the agreement lies at the heart of any lease. Commercial leases are typically long-term, ranging from three to 10 years. Tenants must assess whether proposed terms align with their business plans and ensure they have the flexibility to grow or exit if their needs change. The landlord also has a stake in the process, and deserves to have a lease they can rely on to protect the property should a tenant fail to uphold the terms of the contract.
A related issue is whether the lease provides renewal options. Renewal clauses should specify the right to extend the lease and the timeline and process for exercising that right. To avoid disputes in the future, the rent for any renewal period should be either clearly defined or subject to a fair market rate determination.
Use and Exclusivity Clauses
The lease must explicitly state the permitted use of the premises. This permitted use clause defines how the tenant may use the space and to protect the landlord, must be written to prohibit uses outside that scope. Tenants should ensure the language is broad enough to cover all future growth and anticipated business activities.
Negotiating an exclusivity clause for a tenant seeking to operate in a competitive market may be advisable. This can prevent the risk of a landlord leasing other spaces in the building to a business owners’ direct competitors. Exclusivity can be particularly valuable in retail settings.Landlords who are asked for exclusivity must evaluate whether this would be advisable, based on their current plans for the property.
Rent, Escalations, and Additional Costs
Although base rent is the most visible financial obligation, it is important to understand all payments that could be required of a tenant. Many commercial leases use a triple net or modified gross rent structure. Tenants may be responsible for property taxes, building insurance, repair or maintenance costs, and rent. The owners of the property must ensure that any lease agreement clearly outlines what is expected regarding lease payments, currently and in the future.
The lease should clearly outline how the rent will increase over time. Rent escalations may be tied to the Consumer Price Index (CPI) as a fixed schedule or to increases in operating expenses. Escalation provisions must be reviewed with care, as they can significantly impact a tenant’s bottom line.
Buildouts and the Condition of the Premises
New tenants often require modifications or improvements to the leased space. The lease should clearly allocate responsibility for buildouts. It should specify the following:
- Whether the landlord will offer a tenant improvement allowance
- Who pays for construction
- Which party is responsible for obtaining permits and approvals
Documenting the condition of the premises at the outset is a vital action for both landlord and prospective tenant. If the space is leased “as is,” the tenant should perform a detailed inspection. Documenting the condition of the premises in an exhibit to the lease can avoid later disputes over restoration obligations or repairs.
Maintenance, Repairs, and Alterations
The division of responsibility for maintenance and repairs can vary widely in commercial leases. While some place the burden entirely on the tenant, others distinguish between structural and non-structural repairs. Tenants should ensure the lease does not impose unreasonable maintenance obligations, particularly concerning building systems, such as plumbing, HVAC, and elevators.
Any limitations on the tenant’s right to make alterations to the space should be clearly defined in the lease, protecting both the tenant and the landlord. This includes whether landlord consent is required and under what conditions it may be withheld.
Assignment and Subleasing
Business needs can change suddenly. Tenants should understand their rights with respect to assigning the lease or subleasing the premises. If it becomes necessary to downsize or sell the business, a restrictive assignment clause could make that difficult. Commercial landlords should have broad discretion to reject or approve proposed assignments or subleases. Tenants should negotiate reasonable standards for this type of consent, including the requirement that the landlord cannot unreasonably withhold consent and the landlord must outline how consent will be granted or withheld to help ensure a smooth transition.
Defaults and Remedies
A commercial lease should clearly define what constitutes a default and what remedies are available to the landlord. The most common defaults are failure to pay rent, unauthorized use, and failure to maintain the premises.
Tenants can request a notice and cure period before the landlord has the right to pursue legal remedies or terminate the lease–but these agreements must protect both landlord and tenant. This allows the tenant to correct minor issues before they escalate into litigation or eviction. The lease could be written to limit the landlord’s ability to accelerate rent or pursue other punitive measures. The language of the lease must outline how these matters will be addressed, as both parties deserve a fair outcome in these situations.
Zoning and Legal Requirements
Commercial tenants must ensure their intended use of the property complies with zoning laws, building codes, and all local regulations. Tenants should perform independent due diligence and consult with zoning or land use professionals when necessary. The lease should state who is responsible for compliance with legal requirements, particularly accessibility under the Americans with Disabilities Act (ADA) and fire and safety codes, as noncompliance can result in significant liability.
Consult with Our Team of Commercial Landlord-Tenant Attorneys
When you are signing a commercial real estate lease, the stakes are high, and the terms are negotiable, particularly with the support of legal counsel who understands New York’s complex commercial landscape. Before committing to a commercial lease, seek guidance from our knowledgeable real estate attorneys at Smyth Levenson LLP. We can identify potential risks, negotiate favorable terms that protect tenant and landlord, and ensure the lease agreement is written to achieve long-term success and a favorable business relationship. Contact our firm at 917-540-2729.