While most commercial leases are standard, you should still be careful about what you sign. The fine print matters, and every clause is important! For example, you may find yourself locked into a lease renewal you didn’t want, or you may discover that you have agreed to absurd hikes in monthly rent payments.
Here are 6 of the many clauses to be aware of before entering into a commercial lease!
1. Renewal Clause
Most leases are for 1+ years. Once the term is over, you typically begin to occupy the space on a month-to-month basis. In some leases, a renewal clause may be included which would allow you to continue occupying the space under the same or similar terms and conditions.
Renewal may be automatic or optional on mutual agreement by the landlord and the tenant. Automatic renewal clauses will extend the lease for a stated period of time, unless you give notice of non-renewal within a stated period of time, and by using the stated notification process. If you have the option to renew, you may be in a position to renegotiate your agreement. Either way, pay close attention to the renewal clause as certain dates will be included as well as the procedure for initiating the negotiation procedure, such as providing notice to the landlord of your intent to renegotiate. The deadlines to this process are essential. It is a good idea to mark these dates in your calendar, and give yourself a notice period so that you can prepare to either renegotiate, or to find other premises to rent.
2. Acceleration Clause
An acceleration clause provides the landlord with the right to demand the entire balance of the unpaid rent for the remainder of the term. Usually, the landlord is entitled to collect monthly payments as they become due. In spite of this, in the event that some payments are missed, the acceleration clause allows a landlord to mitigate damages by invoking this right before looking to court proceedings. Acceleration clauses can vary greatly so it’s important to know exactly what a landlord can demand from you in the event of a default under the lease.
3. Rent and Rent Increases
Many commercial leases will provide for a ‘base rent’ and ‘additional rent’. Be sure to calculate the total amount of rent when determining whether the lease is right for you. The total rent can be more than twice as much as the base rent once all costs have been included. Standard rent increases will likely be included in your lease, but changes in utilities or other shared costs may also result in proportional rent increases.
The occurrence of specific events (eg. an increase in property taxes on the premises) may also impact your rent. If you are signing a ‘net lease’, make sure you understand all the additional responsibilities you may have (eg. HVAC repairs) in addition to rent. Depending on the type of lease you are signing, make sure to read it carefully, or speak with a lawyer who can explain it to you, so that you know what to expect.
4. Utilities Payments
Utilities may be included in the rent but take caution. If you are listed as a utility account holder, then you’ll be liable for those payments. There are different combinations of utilities that may be included in your monthly rental payment. If you are in a position to negotiate, you may be able to reduce your rent depending on the extra utilities you’ll be paying for.
5. Sublease & Assignment
Your lease may allow you to sublease or assign your obligations, so look for provisions allowing for either right.
In a sublease, a subtenant would rent a portion of the property or even the entire property from you for a short period of time. A new agreement would be drafted between you and the subtenant, but you are still responsible for all obligations to the landlord. Such a provision will provide that landlord approval is required for any subleasing activities.
In an assignment, the assignee is agreeing to carry out your agreement with the landlord for the remainder of the term. The assignee will be responsible for all obligations to the landlord. Similarly, a clause allowing for assignment will require approval from the landlord so that certain checks, such as background or credit, may be conducted, and the lease can be amended accordingly. You should read the assignment carefully, because you or your guarantor may still be liable for the obligations under the lease until its termination. Be sure to obtain a release from the landlord and the assignee, if possible.
6. Common Elements
Use and access to common elements will often be included as a clause. Not all common elements are “common”. For example, the landlord or other tenants may have exclusive possession or use of a common element, such as a parking spot. Make sure you understand how you can use these common elements or areas. Be aware of your responsibilities for garbage and snow removal as well.
You will also want to be aware of many other aspects of the lease – what use you can make of the premises; what types of insurance you must obtain; what hours your business must/may operate; what signage is permissible; what repairs are the landlord’s responsibility; who will pay for improvements to the premises etc. Be sure to consult a legal advisor if you are unclear about your obligations!
Check out commercial lease templates and samples of the clauses discussed here in the Clausehound Small Business Law Library!
This blog was co-authored by Vi Vo.
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