Navigate the Fine Print: 10 Critical Items You Must Review in Your Commercial Real Estate Lease Agreements

Entering into a commercial real estate lease agreement is a significant milestone for both landlords and tenants. However, amidst the excitement of securing a space for business operations, it's crucial not to overlook the importance of thoroughly reviewing the lease agreement. The lease agreement serves as the foundation for the landlord-tenant relationship and dictates the rights, responsibilities, and obligations of each party throughout the lease term. In this comprehensive blog post, we'll explore the ten critical items that both landlords and tenants must carefully review in their commercial real estate lease agreements to ensure clarity, transparency, and protection of their interests.

1- Lease Term and Renewal Options:
The lease term is the duration for which the lease agreement is valid, specifying the start and end dates of the tenancy. Review the lease term carefully to ensure it aligns with your business needs and long-term plans. Additionally, examine any renewal options or extension clauses that may allow for the continuation of the lease beyond the initial term. Understanding the lease term and renewal options is essential for planning and budgeting purposes and avoiding potential disruptions to your business operations. Remember that the option is a much bigger benefit to the tenant than the landlord. Entrepreneurially minded landlords in rapidly gentrifying markets may be better served keeping leases short and not locking in their economics with options.

2- Rent and Rent Escalation Clauses:
The rent amount and payment terms are fundamental aspects of the lease agreement. Review the lease to confirm the agreed-upon rent amount, frequency of payments, and acceptable payment methods. Pay close attention to any rent escalation clauses, which outline provisions for rent increases over the lease term. Understand the basis for rent escalations, whether it's tied to inflation, market conditions, or fixed percentage increases. Be sure to anticipate how these escalations may impact your operating expenses and budgeting.

3- Common Area Maintenance (CAM) Charges:
For tenants leasing space in a multi-tenant commercial property, CAM charges may apply to cover the costs of maintaining and operating common areas, such as lobbies, hallways, parking lots, and landscaping. Review the lease agreement to understand the calculation and allocation of CAM charges, including which expenses are included and excluded from CAM, the method of calculation, and any caps or limits on CAM increases. Ensure that CAM charges are reasonable, transparent, and seek clarification on any ambiguous or unclear provisions.

4- Use Clause and Exclusive-Use Rights:
The use clause specifies the permitted use of the leased premises and any restrictions or limitations on the tenant's activities. Review the use clause carefully to ensure it aligns with your intended business operations and any zoning or regulatory requirements. Additionally, consider negotiating exclusive-use rights, which grant tenants exclusive rights to operate specific types of businesses or activities within the property, thereby preventing the landlord from leasing space to competitors.

5- Maintenance and Repairs Responsibilities:
Clarifying maintenance and repair responsibilities is essential for defining the respective obligations of landlords and tenants regarding property upkeep and maintenance. Review the lease agreement to determine which party is responsible for maintaining and repairing various components of the property, such as structural elements, HVAC systems, utilities, and interior fixtures. Ensure that maintenance and repair provisions are fair, reasonable, and clearly delineated to avoid disputes and ensure property upkeep.

6- Assignment and Subleasing Provisions:
Assignment and subleasing provisions govern the tenant's ability to transfer or sublease the leased premises to another party. Review these provisions to understand the conditions, restrictions, and approval processes for assigning or subleasing the space. Consider the implications of assignment and subleasing on your flexibility, financial obligations, and control over the premises. Additionally, negotiate favorable terms that provide flexibility while protecting your interests as either a landlord or tenant.

7- Insurance Requirements and Indemnification:
Insurance requirements and indemnification provisions specify the types and amounts of insurance coverage required for the leased premises and allocate responsibility for liability and property damage. Review these provisions to ensure compliance with insurance requirements, including general liability insurance, property insurance, and any additional coverage specified by the landlord. Understand your obligations for indemnifying the landlord against claims or losses arising from your use of the premises and consider seeking legal advice to assess potential risks and liabilities.

8- Default and Termination Provisions:
Default and termination provisions outline the circumstances under which either party may terminate the lease agreement and the remedies available in the event of a breach. Review these provisions carefully to understand the rights and obligations of landlords and tenants in the event of default, nonpayment of rent, or other breaches of the lease terms. Consider negotiating favorable terms, such as cure periods or notice requirements, to provide opportunities for resolution before termination.

9- Alterations and Improvements:
The lease agreement may include provisions governing the tenant's ability to make alterations or improvements to the leased premises. Review these provisions to understand the process for obtaining landlord approval, obtaining necessary permits and approvals, and complying with applicable laws and regulations. Clarify the extent to which alterations or improvements may be made, who bears the cost, and whether any restoration obligations apply at the end of the lease term.

10- Dispute Resolution Mechanisms:
Dispute resolution mechanisms specify the procedures for resolving disputes or disagreements that may arise between landlords and tenants during the lease term. Review these provisions to understand whether disputes must be resolved through arbitration, mediation, or litigation and any associated costs, timelines, and procedural requirements. Consider negotiating alternative dispute resolution mechanisms or including provisions for attorney's fees and costs to incentivize amicable resolution and mitigate the risk of costly litigation.

In the complex world of commercial real estate leasing, attention to detail and thorough review of lease agreements are essential for protecting the interests of both landlords and tenants. By carefully examining the ten critical items outlined in this guide, landlords and tenants can ensure clarity, transparency, and fairness in their lease agreements. Whether you're negotiating a new lease or renewing an existing one, prioritize open communication, seek legal advice when necessary, and negotiate terms that align with your business objectives and risk tolerance. Remember, the lease agreement lays the groundwork for a successful landlord-tenant relationship, so invest the time and effort to get it right from the outset.

Author: David Repka

About the Author:
David Repka is the Co-Founder of Bison Financial Group in St. Petersburg, FL.
Bison arranges debt and equity financing for commercial real estate investors and developers.
Bison has relationships with investors across the risk spectrum funding acquisitions, renovations, and new construction.

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