Commercial real estate leases contain numerous clauses that can have a significant impact on your business. It’s important to understand and negotiate these terms so that you can avoid any misunderstandings down the road.
The Term Clause describes the length of your lease, specifies the start and end dates, and determines whether it can be extended. Look also for escalation clauses that can raise your rent with the Consumer Price Index or other inflation measures.
Located at the beginning of your commercial lease, this clause clearly defines the rented space, including its street address, square footage and other pertinent details. It also indicates the type of ownership structure, such as Net Lease or Gross Lease.
The lease may also include the terms of any rent rate escalation and CAM (common area maintenance) increases, as well as whether the tenant is responsible for paying these expenses. Many landlords use a Consumer Price Index (CPI) or other inflation-based escalation mechanism.
A usage clause stipulates what kinds of activities you can perform on the premises and limits any competing businesses from entering the same area. Some clauses may even exclude a specific kind of business from the property in order to protect other tenants from direct competition.
Many businesses choose to lease space instead of buy it because buying property requires a large up-front capital investment. A use clause in a commercial lease can prevent other businesses that provide a similar service from leasing adjacent spaces and stealing customers.
Permitted-use language in a commercial real estate lease can include requirements such as maintaining an Ansul system, grease traps, vermin treatment and other provisions based on the business’s operations. A tenant may want to push for as broad a permitted-use clause as possible. A stipulation in the lease that allows for subleasing of space is also important. It gives the tenant flexibility in case of financial trouble.
Your company’s demand for space can change dramatically over a lease term. If your commercial real estate lease does not include a sublease clause, you may not be able to shed excess office space as needed.
The best way to ensure you can sublease your space when necessary is to work with an experienced tenant representative who knows how to negotiate these terms. You also want to ensure the sublease clause does not contain a recapture right, which allows the landlord to take back your space without consent. This can be costly, as you could lose access to valuable workspace. If it does, it should be clearly spelled out how the recapture process works.
The end date of a commercial lease is a very important factor to keep in mind. If you fail to vacate on the date your lease expires, there are often penalties involved. This is particularly true if your lease is a Net Lease structure where the tenant pays a portion of the landlord’s operating expenses.
If you wish to extend your tenancy, your landlord must give you a renewal option within a certain time period before your lease expires. Failure to exercise this clause can be costly, especially if your business has experienced growth or been acquired.
Early Termination Clause
A commercial lease typically includes a clause that provides the option for either party to end the contract before its term expires. However, a tenant’s ability to terminate early may be dependent on the condition of the market and whether the landlord believes it will be easy to get the property back on the rental market.
Some common reasons for a business owner to want to terminate a lease include an inability to find additional space that meets their business needs, a merger or sale, or bankruptcy. Therefore, it is important to consider this option when negotiating a commercial lease. In addition, the lease should stipulate what kind of early termination fees are expected.
Personal Guaranty Clause
A personal guaranty is a clause in a commercial lease that makes the tenant’s principal personally liable for all financial obligations of the lease. To limit your liability, your broker can negotiate a Good Guy Guaranty which excuses you from any guaranty if you terminate the lease within the specified time frame and leave the space in good condition.
An unlimited personal guaranty leaves your personal assets vulnerable. However, the Guaranty Law, currently in effect in New York City, prevents commercial landlords from recouping unpaid rent arrears against personal guarantors for periods of time during the COVID-19 pandemic. This law is still under constitutional challenge, so it should be reviewed with legal counsel.