About Commercial Leases
At Equity Legal LLP, we focus specifically on commercial leases, transactions, contracts, and negotiations. We are experienced lease attorneys, and it is our goal to outline some of the common types of lease agreements, questions that pertain to these lease contracts, and what you can do if you get stuck in a situation where a party may need to break a contract.
We will outline this following:
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Commercial Lease Types
Whether you are a tenant or property owner, it is good to understand the various commercial lease types. While a commercial lease attorney in San Diego can review these types in more detail, knowing your options can make it easier to negotiate a contract.
Gross or Full Service Lease
This lease is designed so the property owner covers all the rental costs. These costs include the fees for building maintenance, insurance, and real estate taxes. The tenant is only responsible for the base rent. The property owner can recoup expenses through a load fee, or the rent a tenant pays for using a common area.
Modified Gross Lease
A modified gross lease is designed for a tenant to pay the base rent. After the base year, or first calendar year, the tenant is responsible of a pro rata share of the operating costs. The share of costs is based on the amount of space that is occupied. For instance, if a tenant occupies half of a building, he or she would pay 50% of the operating costs.
Triple Net Lease
A triple net lease is just the opposite of a full-service lease. When this type of lease is signed, the tenant agrees to pay for a building’s operating costs. While a property owner assumes the maintenance fees, property taxes, and insurance in a gross lease, these same fees are assumed by the tenant in a triple net type of lease.
Sometimes a triple net lease and absolute lease are thought to be the same. However, this is not the case. There is a major difference, legally. An absolute lease delivers a property owner from all responsibility for a building. Therefore, a tenant must cover all the building’s expenses, including repairs or maintenance for the structure and roof. This lease is normally applied to those tenants who have a good business standing who possess excellent credit.
Double Net Lease
Another name for a double net lease is a net net lease. In this lease, the tenant is responsible for the building insurance and taxes. The maintenance fees are not included.
A net lease is designed so a tenant pays a part (sometimes all) of the expenses needed to run a building—or, insurance, maintenance, and taxes.
Things To Watch Out For When Negotiating A Commercial Lease
You need to rely on the services of a commercial lease attorney in order to save money on a lease or avoid unnecessarily spending money. When you are negotiating a retail lease, you usually choose a building that is dependent on location. Therefore, negotiating is limited. However, if the space is for an office, you do have more latitude in this respect. Therefore, the following information is worth considering.
Negotiating The Rent
Usually, office space is typically priced per square foot. If the property owner is not willing to reduce the rack rate, he or she might be willing to discuss offering a couple months of free rent.
Most property owners include operating costs to the base square per foot cost. The expenses might include the following:
- Snow removal
- Utilities for the common areas
- Window washing
If you cannot get the owner to add in the operating expenses in the base rent, request that the cots be figured, using a base year calculation. That means no operating costs will be included in the first year. Afterwards, the tenant pays for increases in the operating costs.
See if the owner maintains funds for tenant improvements. If so, you, as a tenant, may not have to pay as much money to get a leased space in move-in condition.
Make sure you know how to handle a breakdown to major building system. For example, who pays for the repairs? What is the age of major building systems, such as the HVAC, plumbing, or wiring? Knowing this information can prepare you for emergencies. Moreover, you need to know who will pay the maintenance costs.
Make sure, before you sign the lease, that you have sufficient parking.
Ask about possible hidden costs, such as high-speed Internet or Wi-Fi. Inquire about your responsibility with respect to plugs or overhead lighting. Are any extra costs included for building security or operations?
The Right to Extend a Lease
If you include a right to extend, you have more negotiation room. Also, ask about sub-leasing options.
WE ARE EXPERT COMMERCIAL CONTRACT ATTORNEYS.
Schedule your FREE 15 minute consultation before signing any commercial lease contract. If you have any questions with regards to the language in your agreement, contract claues, or need assistance with a current contract, please give us a call today!
Can a Commercial Lease be Terminated Early?
Typically, a tenant cannot terminate a commercial lease before the lease term ends without facing penalties, unless the lease permits early termination. A commercial lease normally lasts for a fixed duration, such as five years. Tenants are usually bound by the terms of the lease, even if the business is unsuccessful or they leave the premises.
If a commercial lease is terminated early, the non-breaching party, or the person who did not break the lease terms, is entitled to seek money damages for the default. Leases frequently stipulate that a person who breaches a lease pay a flat sum in liquidated damages.
Some leases feature an acceleration clause, which requires that a breaching party pay the full amount of the lease. Leases may also include a clause where a winning party receives attorney fees.
In order to avoid liability, you need to work with a commercial lease lawyer in San Diego. He or she can insert a clause in the lease that permits early termination. Clauses can be included in the following forms:
- A break clause can be added that gives either party the option to end the lease at least one time during the lease period. A break may be used by either the owner or tenant, provided the conditions of the break are met.
- Modification of the length of the term can be instituted during the lease, when agreed by both parties.
An assignment allows a party to transfer all the interests in a leased property to another person or entity before the end of a lease. Assignments are only permitted if they are included in the lease terms.
- A provision can be added in a lease that permits either party to terminate the lease if the other party commits a material breach, where he or she fails to perform the terms of the contract.
Can a Property Owner Terminate a Commercial Lease?
Most commercial leases allow a property owner with rights of early termination in certain circumstances. Usually these termination rights include the following:
- The right to early termination if a tenant fails to pay his or her rent; or
- The right to terminate the lease if a tenant violates a provision in a lease.
Therefore, it is important for a tenant to follow the terms and conditions of the lease agreement. It is also imperative that the owner follow the requirements set for in the lease for termination. For instance, lease termination stipulations may prove that notice and cure periods be facilitated before termination. These terminations normally require that written notice be conveyed to the party breaching the lease. This gives the tenant an opportunity to fix the problem before the lease is terminated. Consulting with an attorney is essential to make sure the matter is equitably handled.
How to Lease Commercial Land?
When land is leased commercially, the agreement is known as a ground lease. This type of agreement allows a tenant to develop real property during a lease period. After this period, the land and improvements are relinquished to the owner of the property. Ground leases indicate that the improvements are owned by the property owner unless an exception is drawn up. In addition, the taxes incurred during the lease are the responsibility of the tenant.
A ground lease entails leasing a tract of land for a period of 50 to 99 years. This is done so the tenant can build on the land. The lease defines the owner and who owns the building and improvements. Leases of this type are categorized as either subordinated or unsubordinated.
A Subordinated Ground Lease
When a ground lease is subordinated, the property owner agrees to a reduced priority of claims on the real estate, in case of default by the tenant on the financing for improvements. Therefore, this type of lease can benefit the owner because a building construction can increase the property’s value. The owner, in turn, may also negotiate higher payments for the rent.
An Unsubordinated Ground Lease
An unsubordinated ground lease allows an owner to maintain a top priority of claims on the real estate in case of default by the tenant on the financing for improvements. Because a lender cannot take ownership for the default of a loan, a loan professional may be reluctant to extend financing. Although the property owner retains his or her ownership, he or she may have to charge a lower rental rate.
Ground Lease Advantages
A ground lease enables a tenant to build on a prime piece of real estate – property that he or she otherwise could not buy. Chain retailers, such as Starbucks, often sign ground leases when they are expanding their operations.
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