Know Commercial Lease Terms and Understand Your Rights!

While it is true that commercial agreements can be very complicated, this should not be a reason for any business owner to avoid learning about these commercial contract terms and understanding their rights as a tenant. Before committing your business to an agreement for any commercial lease, it would be wise to consider some very specific factors such as how rent and other fees are calculated.

Gaining familiarity with these terms and as a result, knowing as much as possible about your rights as a tenant would certainly be a great help in the negotiation process and enable you to complete an equitable contract for your business with greater confidence.

General Terms and Definitions

In describing the manner in which services and expenses are paid by the tenant to the landlord, different commercial leasing terminologies are used. Though there is no limitation to the commonly used terms in a contract, there are some common terms that are found in the majority of commercial real estate contracts. These include:

Net lease - As the term indicates, this is a rent payment that applies exclusively to real estate. This means that other potential operating expenses such as estate taxes, insurance, utilities, etc. are not incorporated in the rental amount as opposed to triple net lease which does pass on these other real estate-related expenses to the tenant. Generally speaking, this type of contract is most commonly asked by landlords who have newly constructed buildings and facilities. It is also beneficial to tenants at the early stages of the contract term who will feel any increase of the rent amount in the long term.

Gross lease- This usually means that some of the operating expenses are included in the tenant's payment, such as the real estate taxes. Optionally, building insurance and/or common area maintenance (CAM) could be included as well. Tenants should ask what this amount includes especially any of the escalation clauses included in the agreement.

Modified net lease- This is a term that is a compromise of the triple net lease and the gross lease terms. Usually, this is the term used when both parties enter into an agreement to split maintenance expenses, while the insurance and tax expenses would be shouldered by the tenant. This type of contract term is a common one for either side to easily consider because of its ability to be flexible and creative.

Full service lease- This term implies that the tenant's payment incorporates all of the occupancy cost. This typically includes base rent, insurance, C.A.M., real estate taxes and even garbage disposal. In some instances, a full service lease may also include an additional charge for electricity.

Agreement Clauses

During any contract negotiations process, as the tenant it is wise to understand the lease agreement clauses before signing your business into a binding agreement. This will protect you as well as your business from any liability that could occur in the future. It is equally important to discuss and evaluate the monthly rent cost as well as the projected percentage of rent increase in the future, as all of these lease terms are open to negotiation.

Use Clause - This clause is added to the agreement in order to protect the landlord's property. This clause states how a tenant should and shouldn't use the office space. Make sure that you understand how this clause could infringe on your business' operation both now and in the future before completing your negotiations.

Your knowledge ahead of time about commercial lease terms and a clear understanding about your rights as a tenant may help you to better negotiate conditions for the office space you have selected. It is always a good idea to review any contract with an experienced attorney to avoid surprises and feel confident that your business needs are being met and your company can proceed to operate comfortably within the terms of the contract. If you know and understand lease agreement terms and clauses, you will be doing a great service both to yourself and to your company!

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