Clauses Every Commercial Tenant Should Look For
Although most commercial leases have easy to understand terms and clauses, it’s important that every tenant to read through each clause, understand its utility, and know specific ramifications if any clause is activated.
Let’s look at clauses and verbiage commercial tenants should fully understand before locking themselves into a new lease.
Arbitrary to some, the beginning section of commercial leases dictates how the long tenants will occupy the building, when lessees can move in, and other dates activated in “milestones”.
Well-structured commercial leases will have numerous start dates. When reading through commercial lease agreement, tenants should see dates for first payment, move-in, if lease activates upon signature or on another date, and what date the lease terminates. Moving in too soon, paying too late, or failing to follow these dates could nullify the lease before moving in.
Commercial leases often last 1+ years, with extensions based on mutual agreement or automatic renewal. Mutual extensions are discussed close to the initial lease’s termination, whereas automatic renewals activate when the lease is set to expire for a prearranged period.
Deadlines are essential in avoiding penalties, so commercial lessees are encouraged to mark their calendar if they opt out of automatic extensions.
Should lessees miss one payment, the lessor can activate the lease’s acceleration clause which will force the tenant to pay the entire lease instead of catching up on the missed payment. Before litigation, landlords will often initiate this clause to avoid additional costs associated with filing civil action.
Acceleration clauses will vary, so tenants should read through their agreement in full to identify what rights lessors are afforded in the event payments are missed.
Improvement and Alteration Clauses
Commercial tenants may want their buildings to appeal to customers, requiring alterations to be made to grounds or interior. Aesthetic upgrades can increase property value, yet lessors may disagree with certain changes to building structure or exterior landscape.
Understand improvement clauses, including how changes could impact rent and who will pay for upgrades. Any damages could void the lease and impose civil liability, so tenants should communicate their intentions with their lessor.
Use and Exclusives Clauses
Leases may include clauses dictating how, when any why property can be used. These clauses are sometimes tricky, easily violable and could impose hefty civil fines – not to mention void the lease.
Case in point: You intend to operate a sports betting operation, but your lease specifies businesses of this nature require prior permission to run. You fail to secure permission. One day, the landlord makes an announced visit, and discovers this business is operating outside the lease agreement. Since you failed to secure permission, the lessor may terminate your lease on-sight and impose fines per their use and exclusives clauses.
How and where advertising signage is displayed may also be included in this clause.
Sublease & Assignment Clauses
Commercial leases could include clauses allowing the lessee to assign rights or sublet space. Look for these clauses if you intend on subletting unused office space to similar operations, or wish to assign any part of the lease to an assignee.
Any assignments to additional parties should be accompanied by releases. The assignee, who will carry out the agreement for the remainder of your term, and the lessor should also agree to make amendments to parts of the lease which you assigned.
Note that any subleases require landlord approval, and may adjust rent rate to reflect a percentage of profit the original lessee stands to gain.
Other Terms Lessees Should Understand
Insurance requirements, indemnity clauses and what hours of operation are allowed while locked in a commercial lease should also be noted, amended if needed, and followed judiciously.
Be cognizant of dispute methods and solutions; some landlords may opt for arbitration instead of courtroom litigation. Also, the distribution of attorney fees section may require lessees who nullify their contract to pay 100% of the landlord’s legal costs. Finally, foreclosing procedures in commercial leases may allow the landlord to confiscate business equipment upon violation of lease.
If any terminology is vague, leaves the lessee with uncertainty or could cause potential conflict, retaining legal counsel may alleviate confusion and assist the lessee in perfecting their lease to suit the needs of their business model.
Whether short-term or long, never ignore the fine print of commercial lease agreements.