Make sure your business has a secure home, especially when you’re entering a commercial lease agreement. There are some key difference in the types of leases, including different financial implications. Our panelist highlights important considerations for businesses when negotiating lease terms, including rent structure, lease duration, renewal options, and maintenance responsibilities.
Panelist: Austin Mikolaities, attorney, business law and real estate, Shaheen & Gordon, P.A., shaheengordon.com
What are the types and differences of commercial lease agreement forms?
Before entering into any lease negotiation, business owners must understand the different types of commercial leases and how they may impact their business financially. As with all areas of the law, the below forms of commercial lease agreements are subject to change pending your exact agreement and negotiated terms.
Gross Net Lease Agreement: In a gross net lease agreement, the landlord generally covers all property-related expenses, including property taxes, insurance and property maintenance. The tenant pays a fixed rent amount inclusive of the aforementioned expenses. The tenant may still pay utility expenses.
Modified Gross Net Lease Agreement: In this type of agreement, generally, the parties have agreed to a middle ground of lease expenses where each party, the landlord and the tenant, will split certain property-related expenses.
Net Lease Agreement: In a net lease agreement, generally, the tenant will pay fixed rent, plus utilities, as well as their portion of property-related expenses including property taxes, insurance and property maintenance. A net lease agreement has several variations that require the tenant to take on increasing levels of financial responsibility for the building. In certain scenarios, a commercial tenant’s unit, as a percentage of the overall square footage of the building, will be required to pay common-area maintenance expenses (CAM charges). The commercial lease agreement will outline specific CAM charges applicable to the tenant.
What are considerations businesses should make when negotiating and structuring commercial lease agreements?
First and foremost, understanding the form of the commercial lease agreement that you are entering into is imperative. Once you have agreed upon a form and the basic lease agreement terms, it is crucial that you understand and locate the following key terms in your lease agreement:
Rent, Utilities, Net Costs: Rent is often the most significant expense a business faces in a commercial lease. However, rent may not always be a fixed amount paid over the lease term. Commercial lease agreements often contain rent escalation terms that provide for a rent increase, generally each year. Utilities and net costs of the tenant often increase the overall expense of a commercial lease agreement. Understanding which utilities are required for your business, and their costs, is an important factor to consider. Lastly, net costs can push a significant portion of financial responsibility from the landlord to the tenant.
Lease Term and Renewal Options: A balance must be struck between securing a long-term lease to ensure stability and continuity while avoiding being locked into an unfavorable lease agreement. Generally speaking, commercial lease agreements include an initial term while providing the ability to extend the lease term under a renewal or option term. Often a tenant is required to provide written notice on or before a certain date to implement the renewal or option term. It is important to negotiate renewal options to include a pre-determined renewal rental rate that is manageable for your business.
Maintenance and Repair Responsibilities: One common pitfall in many commercial lease agreements is the lack of clarity and poor drafting surrounding which party shall be responsible for repairs and maintenance. Repairs and maintenance of your individual unit versus the exterior envelope of the building are different concerns. Here in New Hampshire, property maintenance may require snow removal, heating systems, salting and clearing ice from walkways, shoveling, and repairs from the harsh environment.
Typically, in net lease agreements, tenants may be responsible for payment.
What is one consideration businesses should keep in mind when entering into a commercial lease agreement?
Unexpected changes in business operations or business continuity occur often. As the real estate market ebbs and flows, commercial landlords may be incentivized to offload properties from their portfolios. In my experience, a large pitfall impacting businesses relates to a landlord’s ability to sell the building in which you lease space. A landlord may sell or transfer the building in which you lease space at any time. While the successor landlord will typically be required to honor your lease agreement, the intentions of a successor landlord may be unknown. A successor landlord may increase annual rent, decline renewal options of the tenant, or increase the financial liability of the tenant, pushing tenants out of their units. When planning for the long-term life of your business, a landlord’s ability to uproot your business may be catastrophic.
A well-drafted commercial lease agreement will positively impact your business to provide stability and financial longevity. It is imperative that businesses of all sizes carefully examine the lease agreement and consult with an attorney specializing in this area of law.
