Commercial Leases Deconstructed

Posted over 1 year ago. Applies to California, 2 helpful votes

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Most businesses rent commercial space from a landlord, and with that endeavor generally comes a lengthy and confusing lease. Although it is recommended that an attorney review, and likely revise, your commercial lease, this article identifies and discusses some information to help you sort through your own rental agreements.

Important Provisions:

1) Term

The term of the contact is its length. If a contract has a term of 5 years, then you have a 5 year contract during which time you should generally comply with the requirements of said contract. In leases, it is important to know what your term is and how the agreement can or will get renewed at the end of that term.

2) Rent Adjustments

It is common for commercial leases to contain allowances for annual rent increases. Even if you are getting a large discount on your first year's rent in your new space, you may end up paying a lot more over the years if there are significant annual bumps to your rent. Rent increases may be fixed, like a 4% increase every year, or variable (usually dependent upon the Consumer Price Index).

3) Other Required Payments and Costs

When leasing a commercial unit, tenants usually pay at least some costs other than rent. This may be common area fees, HVAC (heating, ventilation, and air conditioning), property taxes, etc. It is a good idea to know what you will be expected to pay before signing your lease because it will likely be more than just your base rent.

4) Required Insurance

Commercial leases frequently require both the landlord and tenant to maintain specified levels of certain types of insurance. These amounts and types of insurance may be more than you currently have. You will likely be required to provide proof of your insurance sometime around the time your lease commences. Not doing so, or not maintaining the required insurance would likely be a breach of your lease.

Be Wary of These Provisions:

1) Substituted Premises

Some commercial leases contain sections that allow your landlord to substitute your leased space for another space at the landlord's election. So while you are leasing a space with lots of north facing windows on the 30th floor, your landlord may be able to legally force you out of that space and into a spot on the 15th floor with a few south facing windows.

2) Limitations on Landlord's Liability

These provisions are almost always in commercial leases so it is extremely unlikely that you will get yours removed from your contract. However, some leases release landlords from liability, or owing the tenant a duty or compensation, in almost all circumstances. That could mean that even if landlord makes your space almost unusable, you may have little to no recourse against the landlord.

Additional Resources

Wolk & Levine, LLP

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