Familiarize Yourself With These Standard Commercial Lease Provisions
If you are leasing your business facility, you should be familiar with the following terms and provisions which are commonly found in commercial leases:
1. Gross lease. This is the most traditional type of lease: the tenant pays rent; the landlord pays taxes, insurance, and maintenance expenses relating to the property. Increasingly, gross leases contain escalation clauses, which provide that the amount of rent is to be adjusted (usually each year) to offset increased expenses.
2. Net lease. A net lease transfers some or all of the expenses that the landlord is traditionally responsible for to the tenant. With a single net lease, the tenant pays rent plus taxes relating to the tenant’s portion of the property. Under a double net lease, the tenant also pays its proportional part of insurance premiums. Finally, with a triple net lease (which is often favored by larger businesses), the tenant pays all charges payable under a double net lease, plus maintenance expenses.
3. Fixed lease. A fixed lease provides for a fixed amount of rent over a fixed rental period (term). These types of leases usually seem the least threatening for the small business owner tenant, since you don’t obligate yourself today for rent increases in the future. But, there is a downside to a fixed lease: if you want to renew the lease when it expires, the landlord may choose to raise rent sharply, particularly if your business appears to be doing well, and would suffer from relocating elsewhere. If your initial lease term was short, you might end up wishing that you had opted for a longer term lease with fixed or determinable rent increases.
4. Step lease. A step lease provides for set rent increases to take effect at stated times. This will provide you with the peace of mind of knowing what your rental amounts will be for a longer time period, while giving the landlord some protection against rising costs. If you are considering renting a facility under a step lease, carefully consider whether each of the scheduled rent increases is reasonable. Are the increases out of line with historic consumer price indexes or local rental increases?
5. Percentage lease. With a percentage lease, your landlord shares in your good (or bad) fortune. The lease provides for a fixed amount of rent, plus an additional amount that is set as a percentage of your gross receipts or sales.
6. Lease term. Identifies how long the lease will be in effect. If you suspect that you will want to stay at this same business location beyond the initial term, try negotiating the inclusion in the agreement of a renewal option that entitles you to renew the lease for a specified period and a specified rent.
7. Rental rate. Tells how much the rent is and when it must be paid. Most leases also include late payment provisions that impose additional charges if you fail to pay the rent when it’s due or within a specified grace period. If your business experiences seasonal or irregular sales activity, try negotiating a flexible rental rate that corresponds to the changes in your cash flow.
8. Escalation clause. This clause provides for increases in rent over a specified time period. The escalations can be fixed, or determined with reference to an outside factor, such as increases in the landlord’s operating costs, increases in a cost index (such as the consumer price index), or increases in the tenant’s gross receipts or sales.
9. Maintenance. Specifies who is required to maintain which portions of the building and land. If you are responsible for doing so, the lease should say whether you can contract with anyone of your choosing to provide these services, or whether the service providers have to be approved by the landlord.
10. Competition. In the case of a lease of retail space, such as a store in a shopping mall, there may be restrictions placed on the landlord’s right to lease nearby space to businesses similar to your business. (If there are not, you should consider pushing for such a provision.)
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