Legal Considerations In Commercial Lease Agreements: Key Clauses And Protections

Commercial lease agreements are crucial for commercial real estate (CRE) developers and businesses alike. Buying commercial development property outright is neither feasible nor, in many cases, desirable, for a startup business or one that is just undertaking an expansion, so securing advantageous commercial leases that offer protections against unpredictable adverse events is crucial for these tenants. Developers, on the other hand, typically want to ensure a low vacancy rate, with units occupied by profitable enterprises. Determining the protections that are most crucial in a particular instance and then negotiating effectively to ensure that those clauses are included in the final contract – and that the terms finally agreed-to are mutually satisfactory – can set the stage for a harmonious business relationship that benefits all sides. The Arizona business law attorneys at Harrison Law, PLLC review commercial lease agreements for both landlords and tenants, so connect with a lawyer at our Gilbert office today by calling (480) 320-2310 to schedule a consultation.

Basic Requirements and Standard Terms for Commercial Lease Agreements

Rental agreements are a type of contract, subject to state and local laws. In Arizona, any lease agreement for property – whether residential or commercial – must at a minimum include the provisions required under Ariz. Rev. Stat. (2024) § 32.2173. Most commercial lease agreements will also include terms specifying the parties responsible for various types of maintenance associated with the property, and depending on the type of lease structure (e.g., gross vs. net) they will likely apportion responsibility for other distinct expenses related to occupancy of the premises. There are a variety of other clauses that either the prospective tenant or the landlord may propose, depending on the protections each party most wants to secure. Negotiating the terms of these clauses so that each side of the deal is able to achieve an outcome they consider acceptable is the key to securing a harmonious long-term working relationship.

Alterations Clauses in Commercial Lease Agreements

While any real estate market will have its ups and downs, its periods that favor landlords vs. tenants, as a general rule commercial leasing arrangements tend to have a longer duration than residential rental contracts, and in many cases a commercial landlord has considerable incentive to make accommodations to ensure the property will meet the needs of a desirable tenant, especially if the landlord anticipates that the tenant may become an “anchor” business – as is common, for instance, in many retail development settings. At the same time, not every change made to a property will be equally welcome, and some changes could negatively affect the appeal of the premises for future tenants. For these reasons, it is important for both parties to a commercial lease negotiation to carefully consider the terms presented in any alterations clause.

Who Benefits From Alterations Clauses?

The alteration clause of a commercial lease agreement lays out parameters for changes to the premises. Because these changes are generally requested by the tenant, in one sense a clause that facilitates the updates the tenant wants could in one sense be seen as advantageous to the lessee side of the bargaining table – but the terms contained in the clause can make concessions here either a “deal-breaker” or, contrastively, an easy way to secure the goodwill of a highly desirable long-term tenant.

How Do Alterations Clauses Work?

A prospective tenant may propose an alterations clause with specific terms they consider favorable, in which case typically the tenant will have identified some adjustment to the property, such as the widening of an entrance or the enclosure of a currently open space, that would make the premises more convenient for their needs. The tenant may request that the landlord not only approve the proposed improvements but assume the cost of implementing them and the responsibility for ensuring the work is completed before the tenant’s projected move-in date. From the landlord’s perspective, on the other hand, the alterations clause in a commercial lease agreement can be a place to outline changes that will be considered unacceptable under the terms of the lease (generally these would be major changes to the property that would likely be expensive or time-consuming to reverse, which may be an issue in some shorter-term leases).

Factors To Consider in Negotiating an Advantageous Alterations Clause

The expectations regarding alterations clauses may differ somewhat depending on the length of the lease under discussion and whether the contract is for a single-, double-, or triple-net lease. As in any type of contract negotiation, both parties will to some extent be jockeying for advantage, but the perceived advantages vs. disincentives may tilt a little in either direction depending on the type and scope of modifications requested and the other circumstances surrounding the deal. Because commercial tenancies do tend to have extended durations, often lasting ten to twenty to as much as thirty years, generally speaking, there are strong incentives, for both landlord and prospective tenant, to come up with an arrangement that will ensure both sides get most of what they want and that leaves all parties to the contract confident that the signed lease agreement affords them the protections they need to feel comfortable with the deal.

Co-tenancy Clauses in Commercial Lease Agreements

A co-tenancy clause releases the tenant from the terms of their lease in the event that another tenant departs the premises. This type of clause is often used in retail developments, in which a major retailer serves as an “anchor” establishment that attracts a high degree of foot traffic. Smaller businesses often rely on this foot traffic to ensure a steady flow of prospective customers. If the larger retailer quits their lease, a smaller enterprise whose success has been based on its proximity to the larger enterprise may become unprofitable.

For obvious reasons, co-tenancy clauses tend to be a greater priority for tenants than for landlords. However, a landlord who sees an opportunity to recruit multiple tenant businesses with complementary offerings aimed at similar clientele can in some cases improve the long-term success of their commercial real estate development by laying the groundwork for a situation in which the total development property accrues concentrated appeal within a particular market, and in other instances, a prospective tenant’s desire for an advantageous co-tenancy clause may open the door for the landlord to negotiate concessions in other areas, to everyone’s benefit. A business law attorney with Harrison Law, PLLC may be able to advise you regarding your options for negotiating a co-tenancy clause, whether as a commercial real estate developer or as a prospective tenant seeking to achieve advantageous terms for the lease agreement on a new business location.

Exclusive Clauses

Almost the inverse of a co-tenancy clause, an exclusive clause prohibits a landlord from leasing a unit within the same premises to a competitor of the tenant negotiating the current commercial lease agreement. This is another type of clause that, from one perspective, tends to advantage the tenant; on the other hand, however, landlords have substantial interest in seeing that their commercial tenants maintain thriving enterprises. If either party proposes an exclusivity clause, it is crucial to ensure that the clause is written so as to clearly delineate the business activities that will be considered to constitute “competition” under the terms of the contract. In many cases, it may also be a good idea to set out in the contract terms potential avenues for remedy in case of a perceived breach of this clause.

Key Clauses To Include in a Commercial Lease Agreement

While some clauses, such as those establishing exclusivity or providing for substantial alterations to the property, may not apply in every situation, there are a few types of contract clauses that commercial lease agreements will almost always include, even though the specific terms that emerge out of negotiations will depend on the circumstances and the priorities of the parties involved. The following clauses can be expected to make their appearance in most commercial lease agreements:

• Renewal clause: This is a type of clause that lays out parameters for renewing the lease. The clause may specify the duration of a possible renewal, which can be the same length as the term of the original lease agreement but may also be longer, shorter, or subject to negotiation at the time of renewal.
• Rent escalation clause: An escalation clause is an important part of many commercial lease agreements. Landlords have an interest in defining conditions under which they are able to raise tenants’ fees, typically in response to some measure of changing economic conditions, such as the Consumer Price Index. Tenants similarly stand to benefit from the protections of having the conditions under which rents can be raised spelled out, along with the degree of increase allowable under the contract and how any increase will be calculated.
• Insurance clause: Landlords frequently require commercial tenants to maintain liability insurance. Generally, these clauses are established to ensure that both the tenant and the property owner will be adequately protected in the event of a premises liability lawsuit against the tenant business.

Other clauses may apply, depending on the nature of the commercial property (e.g., retail development vs. industrial use) and whether the agreement is for a gross vs. net lease. A business law attorney experienced in commercial leases may be able to help you evaluate the terms of a commercial lease agreement and help you determine whether additional clauses may be appropriate.

Consult With a Business Law Attorney Regarding Your Commercial Lease Agreement

Both businesses seeking a new or initial location and the commercial real estate developers who seek to attract lucrative, long-term tenants have substantial incentives for thoroughly analyzing every detail of commercial lease agreements. These contracts can have terms lasting from a few years to a few decades, representing a significant commitment from both sides of the arrangement. When commercial lease agreements are carefully drafted and negotiated, the result can be a long-running, mutually advantageous business relationship that enhances the prosperity of all involved. Before signing a commercial lease agreement in Arizona, consider speaking with an experienced business law attorney who may be able to help you evaluate the contract terms and support you in negotiating for key clauses and protections to secure your interests. Schedule a consultation with Harrison Law, PLLC by calling our Gilbert office today at (480) 320-2310.

© 2024 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

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.