Learn The Essential Elements of Commercial Leases
Business owners searching for a space to house their operations have a lot to think about when they make their final decision and sign off on an agreement. Not only does the location matter, but the structure of any buildings on the property and the lease type will also be important facets of the process. The type of lease with which a business owner will be presented depends to a significant degree on the nature of one’s business and the sector in which it operates. Office space, warehouse space, and retail space have different considerations and lease structures. A business owner may find many resources offered by the United States Small Business Administration (SBA). Due to the complexities involved in commercial leasing, business owners might also wish to connect with a legal professional who understands the process and can provide guidance. The Arizona business attorneys at Harrison Law, PLLC welcome you to call (480) 320-2310 for more information.
Basic Elements of a Commercial Lease
When the right location and property are found, prospective tenants can begin negotiating their lease terms with the potential landlords. Some of the basic points business owners considering a commercial lease may wish to discuss during these initial stages of the leasing process may include the following:
Term
The most basic part of lease negotiations for business owners is determining how long they want to have use of the commercial space. Knowing this, one can begin looking for properties that offer leasing options for the desired timeframe. When a lease is signed, the business owner agrees to pay for the space in regular installments for the agreed-upon length of time. Typically, a business can choose either a short-term or a long-term lease. Both types have their advantages and disadvantages. A business’s structure and its viability contribute to determining which would be the right fit.
- Short-Term Lease: The benefit of a short-term lease is that a business owner does not have to make a long-term commitment to a particular space. If a business owner wants to change spaces, they can have an easier time doing so in a short-term lease rather than in a long-term lease. On the other hand, if a business owner likes their space, once their lease terms are up, they may have to go through another negotiation to keep it. The continual need to negotiate and review new lease terms presents the risk that the costs will rise each time. There are no guarantees that a short-term lease tenant can keep their space for the same monthly or quarterly rent they initially agreed to when the first lease was signed. Additionally, the landlord is unlikely to offer many concessions or accommodations to a short-term tenant.
- Long-Term Lease: A long-term lease does lock a tenant into a much longer financial obligation for a space. As a result, there is limited flexibility to relocate, downsize, or expand their footprint. However, a long-term lease can be beneficial for a landlord, as the open space they have that is not rendering rent will now be occupied for a greater period of time over which rent is paid. A landlord is more likely to allow for concessions like tenant improvement dollars as a result, and long-term leases often come with commensurately lower rental rates.
Rent
The cost of the space must also be discussed, and the amount of rent that is agreed to must be paid by a tenant to the landlord when it is due. Hardships or revenue shortages will rarely change a tenant’s financial obligations to their landlord. Rent calculations can be fairly complicated. Several aspects of a building’s space and offerings go into these rental cost computations. Factors like usable square feet, rental square feet, tenant load factor, and more are all incorporated into the rental cost equation.
Escalations
Escalations are typically designed to be used in long-term leases where a landlord’s costs can fluctuate with things like market changes or inflation. Often, landlords will insist on having escalation provisions in a commercial lease to help offset and pay for higher costs they may experience over time. The way this works is that tenants pay a lower rental cost at the beginning of their lease and then gradually start paying more. Escalations can be accomplished through either a fixed amount of increased rental costs, a percentage of increase to base rent, or by following an index like the Consumer Price Index (CPI) provided by the United States Bureau of Labor Statistics.
Operating Expenses
Landlords have a duty to keep up their properties and to ensure these are compliant with applicable building codes and functional for their tenants to use. Although in long-term commercial leases, some of the choices in property improvements and costs of maintenance are often absorbed by the tenants. Accounting for the ongoing costs of property upkeep can still leave landlords with limited buffers. This is why, in addition to base rent, some proportion of these sustained expenses will often be passed down to tenants, separately from any improvements the tenants undertake on their own initiative.
Free Rent
In some situations, free rent is offered to tenants, or a period of time where the agreed upon base rent will not be required. Free rent does not mean operating expenses and other costs will be suspended. Another caution is that when free rent is offered it sometimes means that the base rental rate is higher than if it were not. A business owner should look closely at all details when evaluating the total costs of a commercial lease. If the terms are not clear, it may be a good idea to call a business lawyer at Harrison Law, PLLC for assistance in examining the potential benefits or pitfalls of free rent and other lease incentives.
Rights
Life can be unpredictable, and things can change. As a result, tenants have certain rights that should be included in a commercial lease. A few common examples include the ability to sublease, expand, or terminate an agreement.
Amenities
Amenities and benefits that come with a property like dedicated parking spaces, signage, and accessibility are yet another facet of what should be included when drafting a commercial lease. Which amenities are most valuable will likely depend on the type of business.
Speak With an Arizona Business Attorney Today
If you are feeling overwhelmed thinking about all of the ins and outs of negotiating a commercial lease, the good news is you do not have to manage the process alone. The Arizona business attorneys at Harrison Law, PLLC may be able to assist you. Schedule a free consultation with a member of our experienced legal team by calling (480) 320-2310.
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This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.
