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A commercial building lease is a legally binding agreement between a landlord and a tenant, defining the terms and conditions of renting a commercial space. This agreement outlines the rights and obligations of both parties during the lease term, including the rental rate, lease duration, payment terms, maintenance responsibilities, and many other crucial aspects of the lease.
Types of Commercial Building Leases
There are two main types of commercial building leases: net lease and gross lease. The tenant pays rent, property taxes, and maintenance costs in a net lease. On the other hand, in a gross lease, the landlord takes care of all the expenses, and the tenant only pays the monthly rent. Both leases have pros and cons, and choosing the right one depends on the business's specific needs. Following are other types of commercial building leases:
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Modified Gross Lease
A modified gross lease is a hybrid between gross and triple net leases. In a modified gross lease, the tenant pays a fixed rent each month, including some or all of the property expenses. This type of lease is often negotiated between the landlord and tenant and can be customized to meet the needs of both parties.
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Percentage Lease
A percentage lease is a type of lease that requires the tenant to pay a base rent plus a percentage of their gross sales. This type of lease is often used in retail spaces where the tenant's sales are directly related to their use of the space.
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Ground Lease
In a ground lease, the tenant leases the land from the landlord and is responsible for building and maintaining the commercial building on the property. This type of lease is often used for large-scale commercial projects such as shopping centers or office parks.
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Short-Term Lease
A short-term lease is a lease agreement that typically lasts for one year or less. This type of lease is often used for temporary or seasonal commercial uses, such as pop-up shops or seasonal businesses.
It is important for tenants and landlords to carefully consider the type of commercial lease that best suits their needs and negotiate the lease terms accordingly.
Essentials of Negotiating a Commercial Building Lease
Negotiating a commercial building lease is a crucial aspect of the leasing process. Tenants should take the time to review the lease carefully and negotiate the terms that are favorable to their business. The lease terms are not set in stone, and it is possible to negotiate clauses such as rent increases, security deposits, or lease renewals. To ensure that all legal requirements are met, and the lease is fair, it is recommended to consult with a tenant lawyer who specializes in commercial leasing.
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Lease Term
The lease term is the length of time that the tenant will be leasing the commercial building. Negotiating a lease term suitable for both the tenant and the landlord is important. Factors to consider include the tenant's business needs, market conditions, and the landlord's long-term plans for the property.
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Rent and Rent Escalation
Rent is typically the largest expense for a tenant in a commercial building lease. Negotiating a fair rent that reflects the current market conditions and the property's value is important. Rent escalation clauses should also be considered, determining how rent increases over time.
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Security Deposit
The security deposit is the amount the landlord holds to cover any damages or unpaid rent at the end of the lease term. Negotiating a reasonable security deposit consistent with the market conditions and the tenant's financial situation is important.
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Tenant Improvements
Tenant improvements are modifications to the commercial building to suit the tenant's business needs. It is important to negotiate tenant improvement allowances, which are funds provided by the landlord to cover the costs of these improvements. The terms of tenant improvements should be carefully negotiated and included in the lease agreement.
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Use Clause
The use clause specifies the permitted uses of the commercial building. It is important to negotiate a use clause consistent with the tenant's business needs and allows for flexibility if the tenant's needs change over time.
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Maintenance and Repair Responsibilities
The lease agreement should clearly define maintenance and repair responsibilities. It is important to negotiate a fair allocation of these responsibilities between the landlord and the tenant.
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Renewal and Termination Options
Renewal and termination options provide the tenant with flexibility at the end of the lease term. It is important to negotiate reasonable renewal and termination options that reflect the tenant's business needs and the landlord's long-term plans for the property.
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Subleasing and Assignment Rights
Subleasing and assignment rights allow the tenant to lease the commercial building to another party or transfer the lease to another party. It is important to negotiate reasonable subleasing and assignment rights that reflect the tenant's business needs and the landlord's interests.
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Legal Review
A commercial building lease is a legally binding document that an experienced real estate attorney should review. It is important to have the lease agreement reviewed by legal counsel to ensure that it is fair and reflects the interests of both parties.
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Negotiation Process
The negotiation process should be conducted in good faith, with a willingness to compromise and find mutually beneficial solutions. Maintaining open communication and a positive relationship between the tenant and the landlord is important throughout the negotiation process.
Key Terms
- Rent: Rent is the amount of money that the tenant pays the landlord to use the commercial building. It is usually calculated based on the square footage of the leased space and is typically paid every month.
- Triple Net Lease: A triple net lease is a commercial building lease in which the tenant is responsible for paying all of the property expenses in addition to rent, including property taxes, insurance, and maintenance costs.
- Tenant Improvements: Tenant improvements are modifications to the commercial building to suit the tenant's business needs. The cost of tenant improvements is usually negotiated between the tenant and the landlord and may be funded through a tenant improvement allowance provided by the landlord.
- Use Clause: The use clause specifies the permitted uses of the commercial building. It is important for both the tenant and the landlord to carefully consider the use clause to ensure that it is consistent with the tenant's business needs and any zoning or regulatory requirements.
- Security Deposit: A security deposit is a sum of money held by the landlord to cover any damages or unpaid rent at the end of the lease term. The security deposit amount is usually negotiable and may be based on factors such as the tenant's creditworthiness and the length of the lease term.
Conclusion
To summarize, a commercial building lease is crucial to running a business. Understanding the terms and conditions included in the lease agreement is essential for avoiding any future conflicts. Tenants should negotiate the terms that are favorable to their business and seek the advice of a tenant lawyer to ensure that the lease is fair and legally binding.
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Brian R.
Brian C. Restivo, the managing member of Restivo Legal, PLLC, has been licensed by the State Bar of Texas and continuously practicing as an attorney since November of 2000. Over these years, he has represented customers across the spectrum - from a Fortune 500 company to individuals - and is seasoned at tailoring his services to the unique needs of each customer.
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I grew up in Beaumont, Texas. I attended Baylor University for college and the The University of Texas School of Law for law school. I gained extensive experience in many areas of transactional law through my former position as corporate counsel at National Western Life Insurance Company and my current position as an Associate at Nance & Simpson, LLP.
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Tiffany received her Juris Doctorate from the J. Reuben Clark Law School, Magna Cum Laude. She is admitted to the Utah State Bar and the New Mexico State Bar. She practices in the areas of real estate, general business, business formation, employment agreements, and civil litigation.
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Travis counsels individuals and businesses on a broad range of complex topics. His practice centers on producing efficient, client-driven results. He concentrates his practice on real estate, construction, and general business matters with an emphasis on assisting clients both before and after problems occur by drafting contracts designed to best position clients to avoid disputes and litigating matters to a final resolution if problems emerge. Born and raised in Oklahoma, Travis is a triple graduate of the University of Oklahoma, having obtained his Bachelor of Arts, Master of Business Administration, and Juris Doctor degrees from OU. Prior to practicing law, Travis managed the finances and business operations of a successful construction supply company for several years. This insight into sophisticated business dealings, contractual issues, and strategic planning makes him uniquely qualified to handle a wide range of legal matters. Travis lives in Norman with his wife, Haley, dogs, Walter and Poppy, and cat, Ernest. Outside of the office, Travis enjoys playing golf and reading.
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Commercial Building Lease
Florida
What's permitted use in a commercial lease?
I am in the process of negotiating a commercial lease for my business and I am interested in understanding the concept of "permitted use." Specifically, I am curious about what activities are allowed in the leased space and what limitations there may be. I would like to consult with a lawyer to ensure that the terms of the lease align with the needs of my business and that I am not at risk of violating any provisions.
Diane D.
Permitted use means that you can only use it for the reason you rented it. For example, you cannot rent a place to use as a gym but then use it for a nightclub.
Real Estate
Commercial Building Lease
California
What's CAM charge in a commercial lease?
I am currently negotiating a commercial lease for a property where I plan to operate my business. As part of the negotiation process, the landlord has mentioned the concept of a CAM (Common Area Maintenance) charge, which I am unfamiliar with. I would like to seek the advice of a lawyer to better understand what a CAM charge is, what it covers, and what my responsibilities as a tenant would be in relation to this charge.
Paul S.
CAM charges are for common area maintenance. For example, in an office building, CAM charges are for maintaining the lobby, elevators, corridors, and outside areas (such as the parking lot). If you are looking at renting a space, the landlord should be able to provide you with CAM numbers for that space for the past several years, so you know what to expect.
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