Commercial property

Commercial Property Leasing : Essentials to Know

Commercial property lease remains one of the most important aspects of running a successful enterprise. Since rent remains a significant hidden cost, it is imperative to negotiate a favorable commercial contract that fuels your business growth in the long-term.

A formal agreement between landlord and business tenant, a commercial lease comes with a host of details. Before negotiating a commercial lease, it is essential to evaluate your business requirements and identify the current and future space needs. Besides, also determine your budget, preferred location and potential landlords. A lease agreement covers many aspects. As a potential tenant, you must read the lease thoroughly and ask for modifications that will favor your business.

Here we have discussed about few points for Commercial Property Leasing

1. Know your building owner and the landlord

While leasing a commercial property, tenants often overlook information regarding the property’s true owner. It is important to research and learn more about the landlord. At times, the direct landlord is not the actual building owner. Either way, try to find as much as possible about the history of the building and its ownership. Since you are entering a mutual agreement, try to know more about who they are and their current financial state.

2. Understand the location

Location means everything for a business to thrive. It is one of the most important aspects of leasing a commercial property. In order to get the best possible deal, analyse the area and get a hold of potential clientele. If you are on the lookout for a new property, make sure to select one based on your business requirements. It may take some time, therefore, plan accordingly. After finalising a location, it is crucial for both the tenant and the landlord to clearly define the location and the precise square footage of the premises.

3. Zoning laws

Zoning laws refer to regulations that allow a property to be used in a stipulated manner. Make sure that your business model is in accordance with the standard zoning laws of that area. There are scenarios where owners lease a commercial property to run a particular business, but that may not match the zoning laws of the area. In order to operate your business without any legal issues, ensure all the rules are being followed.

The tenant must also ensure that the landlord has the legal authority to enforce the lease, and has all the critical documents in place, such as registration certificates and property tax receipts. Extra care must be taken to ensure that no ambiguity exists in this respect.

4. Period of the lease

Before the rent and other expenses can be negotiated, the lease term and commencement date must be established. The lease term is the period during which the tenant is obligated to pay the rent for the premises. The years of commencement and termination of the lease should also be explicitly stated in the lease. Therefore, ensure that option to renew the lease at the end of the term is mentioned in the lease.

Commercial leases are generally structured over nine years with rent escalations every three years. Escalations are meant to index the rent to inflation. Shorter-term leases are rare in commercial offices because the tenant invests significantly in interior fit-outs as the offices are handed over in a bare shell form without wiring or lighting. For the tenant to recover their investment, the tenure should be sufficiently long. Importantly, if the owner of the property wants to terminate the lease prematurely, the investment losses of the tenant should be calculated and recovered under the agreement.

Once the term of the lease is clear, the rent and other expenses can be negotiated. Due dates, mode of payment, security deposit, and rate of escalation must be clearly stated in the agreement. The grace period before a penalty is charged and the penalty amount must be subject to negotiation.

5. Added Amenities

At times, a landlord may not wish to lower the base rent because it could reduce the amount to be paid by the future tenants. Hence, property owners are often willing to offer a discount via free rent periods. They may also provide amenities, including free employee parking or Wi-Fi.

6. Upkeep of the Property

Tenants should review the maintenance, repair, and insurance expenses stated by the landlord and ensure that they are consistent with the lease agreement. Based on the type of agreement, expenses for the common area and maintenance are divided between the owner and the tenant. Thus, all the common area maintenance charges must be pre-determined and agreed upon by both the tenant and the landlord. Here’s a list of additional costs that a tenant should be aware of:

  • Insurance
  • Interior and exterior maintenance
  • Utilities (water, gas, electricity)
  • Property taxes
  • Repairs
  • Security
  • Parking

7. Sublease & Assignment of the property

The tenant must also know their rights to sublease the premises. If the tenant decides to move prematurely, subleasing the whole space could allow them to move elsewhere without paying a hefty lease termination penalty. It is a standard practice in commercial property leasing where landlords keep the right to terminate a tenant’s lease prematurely. Since a premature termination has significant implications on both sides, the parties should negotiate a notice period. The scope for termination in case of a contract breach should be strictly defined.

However, mutual terminations should be allowed at any time. Along with this, there are few additional clauses such as:

• Personal exposure: In some cases, property owners ask for personal guarantees while signing a lease. Take the help of a legal counsel while negotiating this term to avoid pitfalls.

• Holdover rent: It refers to the rent increase when a tenant stays after the lease has expired. This may happen in case the businesses are moving spaces. The rent in such cases is exponentially higher.

• Non-disturbance agreement: This allows a business owner to continue running his/her business undisturbed in case of the transfer of ownership of the commercial building.

An important factor, especially for retail tenants, is to obtain exclusive rights to sell goods or provide services. Tenants can ask for a competitor clause in the lease that requires the landlord to get their consent if the space is already rented out to their direct competitor.

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Make sure to read your commercial property lease thoroughly and understand it. This allows you to go through all the benefits, as well as prepare you for your responsibilities as a tenant.

(Disclaimer: All the statements are opinions and perspectives. Hence, the accuracy of the facts is not guaranteed)

Written by: Jasleen Kaur


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