Just as a residential landlord must ensure that a residential property is livable, a commercial landlord must ensure that the property they rent out to a business tenant is suitable for operations. This includes:
- Complying with all state and local building code regulations for commercial real estate regarding safety, habitability, and accessibility, both at the onset of the lease and during the lease period
- Making necessary repairs to structural defects. Are the electrical units working? Is the gas functioning correctly? Is the roofing sound? Are there any plumbing issues?
- Negotiating clear terms of the lease. It is usually the landlord who provides the initial draft of the lease. The terms should be carefully spelled out so that the tenant and the landlord understand their relative rights and responsibilities
- Ensuring that the tenant’s business will not be disrupted by issues with the building
- Ensuring that heat or air conditioning is working properly
- Minimizing risk. Are the smoke alarms working? Are the locks on doors and windows secure? Is there a security system?
- Obtaining all types of needed property and casualty insurance
Commercial landlords are commonly responsible for:
- Removal of waste and hazardous materials
- Common areas, such as hallways and bathrooms
- Water faucets and piping
- Heating and air conditioning
- Electricity
- Security of the windows and doors
What to Consider in a Commercial Lease?
Signing a commercial lease can be a frightening experience for a small business owner since many terms in the contract might be unfamiliar. Every clause in the agreement should be examined to see how it affects the rights and responsibilities of both the landlord and the tenant.
Before signing a lease as a commercial tenant, you should definitely consider:
- Are the terms of the lease negotiable? If so, are there any terms that need to be changed to fit your particular business – e.g., do you need stronger locks on doors? Consider the nature and size of your business. Are there any specific features or amenities that are necessary for your business to operate effectively?
- To determine a fair price for the property, research local rental rates, the lease terms offered by other landlords, and the incentives to which you might be entitled. Is the rent in line with the rent for the neighborhood?
- Carefully review the terms of the lease. What are the landlord’s responsibilities? What are your responsibilities? Are these consistent with the terms of other commercial leases in your area?
- Does the lease define the space? Its size, for example, and whether size is based on a rentable or usable basis? The lease should define all key terms, including what is “usable’ space
- Who will be responsible for cleaning the leased space?
- What alterations is a tenant allowed to make, and what is forbidden?
- Who is responsible for which repairs?
- If the tenant asks for a minor repair, how soon is the landlord expected to accomplish it?
Why Would a Tenant Want Exclusive Use of the Property?
Requesting “exclusive” use means that the tenant wants to ensure that the landlord won’t rent out space to similar businesses close to the tenant’s location. (This is similar to a non-compete clause in an employment agreement.) A tenant will likely lose business if the landlord allows a competitor to open in the same building as the tenant. Asking for an exclusive use clause in the lease is a reasonable way for the tenant to prevent that from happening.
Exclusive use clauses are most common in shopping centers. For example, if the tenant sells chocolates, they might want an exclusive use clause so that they do not have to compete with other chocolatiers. A tenant will want such a clause before investing in building out the space, investing in advertising costs, etc.
From the commercial landlord’s point of view, however, having a limit on the type of tenants to whom they can rent out the property in the future might interfere with their plans for the space. Particularly if more than one business tenant asks for exclusive use of the property, the landlord can become constricted in how they can rent out the space.
When negotiating with a tenant over exclusive use, the landlord can try asking for certain compensations in exchange for exclusive use, such as higher rent.
What Happens If the Tenant Sells or Transfers His Business?
Business ownership often changes several times over a business’s lifespan. If the tenant sells his business to another, a landlord should either ensure that the old lease is enforceable or create a new lease and treat the new owner as a new tenant. Signing a new lease is usually easier.
The tenant may also try to sublease the property to another. The lease will dictate whether the landlord has reserved the right to approve or disapprove a particular sublease candidate.
What Happens If the Business Is Unable to Pay Rent?
Commercial tenants unable to pay rent are treated similarly to residential tenants. The consequences of failure to pay rent should be spelled out in the lease.
The landlord’s first step is usually to assess late fees for late payments. If the matter goes into collections, the landlord may be able to demand that their legal fees be paid.
Failure to pay rent is a breach of the lease and results in its termination. This is a serious matter for both parties. The breach allows the landlord to begin eviction processes. The eviction has to be done in accordance with the terms of the lease, and also in accordance with local law. These laws vary from place to place in terms of how much notice the landlord is required to give, whether the tenant has the right to keep the space if they catch up on the rent, and more.
However, evicting a tenant should probably be a last resort. Most commercial rental spaces are built out for the tenant’s specific purposes. This can make it hard to find a new tenant for the property. If the reason the tenant is not paying is because of a slowdown in business, the landlord may want to consider arbitration or mediation before attempting to evict the tenant so that a compromise can be reached.
One potential solution is to let the tenant sublease the property to another business. This saves the landlord the trouble of finding a new tenant.
Do I Need a Lawyer for a Commercial Lease?
Commercial leases often have complex clauses and terms. Seeking the help of an experienced real estate lawyer to look over or negotiate a commercial lease is highly recommended. The details of the lease are very important, and you may or may not spot any potential problems in the lease as it is drafted.
For the tenant, a good lease will help you run your business more smoothly since you are less likely to have unresolvable problems with the landlord. A bad lease can restrict your ability to run the business as you want to.
For both parties, a good lease will reduce the chances that you will wind up in court. And if you do, a good lease will protect your interests.
