Entering Into a Commercial Lease: What to Know when Leasing Commercial Property
What do you need to consider when negotiating a commercial lease?
When negotiating a commercial lease, the first thing you will need to determine is how the costs associated with the property are going to be split. Unlike residential leases, commercial leases usually include provisions for tenants to pay property taxes and insurance for the property as well as common area maintenance (“CAM”) fees. Leases which include taxes, insurance and CAM fees are called “Triple Net” or “NNN” leases and are the most common leases.
Depending on the square footage of the premises, the number of other tenants on the property, and other aspects of the property, all of these fees can vary dramatically from property to property and season-to-season on the same property. For both tenant and as a landlord, it is important to build stability and security into the lease to prevent future problems arising from disputes over these additional fees.
Other lease arrangements can include percentage leases, where the business pays a lower monthly set rate but is required to pay the landlord a percentage of the business’ income, or full service leases where the landlord takes care of all additional fees but charges a significantly higher monthly base rent. Of course, every lease is different and a lease could include different components of all of these types of leases. Commercial leases are far more negotiable than residential leases for this reason.
When leasing a property, the physical space of the property also should be considered for both the business and the property owner. Businesses have unique needs and additional requirements that residential leaseholders do not. For instance, businesses holding themselves out to the public must be ADA compliant. Other businesses will require environmental inspections and mitigation. Property owners in particular should be diligent in requiring proper environmental compliance because property owners may incur liability in the future for the actions of a commercial tenant.
What if the property needs improvements?
Property owners and business owners will also need to ensure that the premises being rented is fit for the business. Often this means making improvements and installing new fixtures. It is important to determine who is responsible for paying for these improvements and who will retain the benefits of the improvements once the lease is over. Often, property owners will allow a rent-free period while improvements are being made. These aspects of the lease agreement should all be negotiated and clearly set forth in the lease to ensure a fair deal and positive relationship between the business and property owner.
Are there specific requirements?
Lenders may also have specific requirements or limitations for the usage of the property. A problem common in Colorado is the unwillingness of lenders to allow property owners to rent to commercial tenants who have any involvement with marijuana because they are technically operating in violation of federal law. As a property owner, this could result in the lender making the entire mortgage due and potentially losing the property. As a tenant, this could mean being evicted and losing your business location. Geraghty Law Office can help you determine what is best for your situation.
If you need help drafting or negotiating a commercial lease, or have any questions about commercial leases in Colorado, GLO can help you. Please fill out an intake form if you are interested in scheduling a consultation with GLO.
GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific fee arrangements and signed engagement letters. GLO does not guarantee any results.