Drafting Commercial Real Estate Lease
What is a Commercial Real Estate Lease?
A Commercial Real Estate Lease Agreement is a contract used when renting property for commercial reasons. The contract establishes a relationship between the renter (tenant) and landlord, which includes establishing the right to use the property for business reasons during the terms of the lease in exchange for compensation.
There are three main types of Commercial Real Estate Lease Agreements: Net Lease; Percentage Lease; Gross Lease.
Net Lease: A net lease is where the tenant pays a base rate, but also shares in the operating costs of the building. Expenses to the tenant is responsible for is dependent on what type of net lease is being used.
Percentage Lease: A percentage lease is where the tenant pays a base rate and operating expenses plus additional variable costs based on monthly revenue. These are very typical for real estate spaces in highly desirable areas. Base rates are also less than a net lease or gross lease and have many mutual benefits between landlord and tenant.
Gross Lease: A gross lease requires the tenant to pay one flat rate per month. The tenant will not be billed separately for any of the building’s operating expenses, as these will be estimated and included in the overall rent.
What are the key terms of a Commercial Real Estate Lease?
Lessor: the landlord, or who the person is granting the lease of the property.
Lessee: the tenant, or the person or business leasing the property from the landlord.
Use: the provision specifying how the premise is to be used.
Exclusivity: term that limits the landlord from renting out nearby space to a competitor or similar type of business.
Lease Term: term that dictates when the business can take the space.
Renewal: term that outlines the process of renewing the lease.
Expenses: term that indicates which party is responsible for paying which expenses.
What issues to keep in mind?
Commercial Real Estate Lease Agreements are typically negotiated on landlord forms which require careful review since such forms tend to be heavily favorable to landlords. Leases are also typically long-term agreements, so they can have a big impact on a business’ profitability.
Two common issues that a lessee needs to keep in mind or negotiate are:
Assignment and Subleasing: Landlord’s consent to a tenant to turn over or sublet to another entity or person before the lease ends.
Personal Guarantee: Landlords may require a personal guarantee for rent payments when the lessee has below average credit.