What You Need to Know About Commercial Real Estate Leases

Commercial Real Estate Leases

Commercial real estate leases are a typical business expense, and many are quite complicated. Often leases are recycled by landlords, but are the basic terms of the lease correctly stated? Is there a letter of intent or term sheet? If so, the lease, as drafted, should conform.

When it comes to commercial leases, there are several options to what the tenant is responsible for besides base rent each month.  In a gross lease, the landlord pays all of the expenses associated with the property, including utilities, janitorial, taxes, maintenance, and the like.  In a net lease, the tenant pays utilities and property tax, and the landlord pays maintenance, repairs and insurance.  In a double net lease, the tenant is responsible for utilities, property taxes and insurance premiums for the building, and the landlord pays maintenance and repairs. In a triple net lease, the tenant is responsible for all costs of the building, but the landlord is generally responsible for structural repairs.  Lastly, in a modified gross lease, structural repairs and operating expenses (property taxes, property insurance, common area maintenance, and utilities) are typically split between the tenant and landlord after a period of time of tenant only paying base rent.

Besides confirming what is included in operating expenses and negotiating items that are not pertinent to your space, tenants should be wary of escalation clauses. The most common escalation clause passes through to the tenant any increase in operating expenses and real estate tax.   Tenants should be sure to negotiate a cap on this.

Also, aside from the initial issues of what bills will be paid and by whom, pay careful attention to who is responsible when problems arise, how any maintenance issues are to be resolved, and how they will impact rent.

Indemnity provisions should also be reviewed carefully to be sure the tenant is not inappropriately assuming liabilities.  Generally, the indemnification should be limited to anything that happens in the leased premises and without consequential or special damages. The tenant’s indemnification obligation should exclude the actions and negligence of the landlord and its agents, employees, and contractors.

Lastly, default provisions should also be scrutinized. No notice of the default from the landlord, no cure period, and both interest and penalties for late payments are provisions to avoid. Ideally, the tenant should have a cure period after notice from the landlord that either a payment if late or a non-monetary item addressed by the lease needs attention.

Contact your attorney or the Real Estate Attorneys at OWM Law to help you negotiate and/or review your commercial real estate lease.

— Written by Joseph K. Koury, Esq.

DISCLAIMER: The contents of this blog are not legal advice, and are not to be used for that purpose.  If you are faced with a legal matter, you should contact a lawyer immediately in order to ensure that you are protected.