Commercial leases are agreements that govern the relationship between landlords and tenants. Whether you are a landlord or a tenant, understanding the key provisions in a commercial lease is critical for protecting your interests and avoiding costly disputes. Consulting with a legal professional before entering into any commercial lease agreement can help both parties ensure they are making informed decisions and securing the best possible terms.

Common Provisions Landlords Should Be Aware Of

A. Rent and Escalation Clauses

For landlords, the rental rate and rent escalation provisions are among the most crucial aspects of a commercial lease. These provisions determine how much rent the tenant will pay and how that amount may increase over time. Some common rent escalation methods include:

• Fixed Increases: Rent increases by a set amount at regular intervals
• Percentage Increases: Rent is increased by a percentage based on predetermined factors, such as the Consumer Price Index (CPI)
• Operating Expense Increases: The tenant agrees to pay a share of increased operating costs, such as property taxes, insurance, and maintenance fees

B. Permitted Uses

The permitted uses clause specifies how the tenant is permitted to use the premises. Landlords should pay close attention to this clause in order to control the types of businesses that can operate on their property, and to prevent tenants from using the premises in ways that could damage the property, disturb other tenants, or violate zoning laws. A well-crafted use clause will:

• Limit activities that could harm the building or disrupt other tenants
• Ensure compliance with local zoning laws and regulations
• Protect the property’s value and reputation by restricting certain high-risk or undesirable uses

C. Maintenance and Repair Obligations

Commercial leases often divide maintenance and repair responsibilities between the landlord and the tenant. Landlords should be aware of the specific obligations they are agreeing to in this clause. In many cases, tenants are responsible for routine maintenance and minor repairs, while landlords are responsible for major structural repairs and building systems (e.g., HVAC, plumbing). Common arrangements include:

• Triple Net Lease: Tenant covers property expenses such as taxes, insurance, and maintenance
• Gross Lease: Landlord pays for most expenses, and the tenant pays a lump sum rent
• Modified Gross Lease: Costs are split between the landlord and tenant

D. Subletting and Assignment Clauses

Many commercial leases include provisions that allow or restrict the tenant’s ability to sublease the property or assign the lease to another party. Landlords should carefully review these provisions to control who occupies their property. To protect themselves, landlords might reserve the right to approve or reject a proposed new tenant.

Common Provisions Tenants Should Be Aware Of

A. Rent and Operating Costs

For tenants, understanding how rent is structured and what additional costs they may be responsible for is crucial. While the base rent may be clearly stated, tenants should pay attention to:

• CAM (Common Area Maintenance) Fees: Tenants in multi-tenant buildings may be required to pay a portion of the cost of maintaining shared spaces like lobbies, restrooms, and parking lots
• Triple Net Lease: In these leases, tenants pay a share of property taxes, insurance, and maintenance costs in addition to base rent

B. Termination and Renewal Provisions

The lease term and the options for renewal or termination are important for tenants who want flexibility. Tenants should be aware of:

• Early Termination Clauses: Some leases allow tenants to terminate the agreement early, sometimes with a penalty. Tenants should assess whether the penalties are reasonable and whether they align with their business needs.
• Option to Renew: Tenants should look for provisions that allow them to renew the lease at the end of the term. The renewal clause should specify how much notice must be given and whether the rent will be renegotiated or follow a predetermined formula.

C. Exclusivity Clauses

Tenants should be aware of exclusivity clauses, which can prevent the landlord from renting nearby spaces to direct competitors. For example, a tenant operating a coffee shop might negotiate an exclusivity clause that prevents the landlord from leasing another space in the same building to another coffee business. This protection can be crucial for tenants in competitive industries and can greatly impact their success in a given location.

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