Commercial Lease Provisons
A commercial lease is a contract between you and the landlord. Like any other contract, the terms of a lease can be negotiated. This glossary should assist you in understanding provisions commonly contained in commercial leases. Below you will find a list of important terms you should be familiar with as you go through the commercial lease negotiation process. If you have further questions, visit FindLaw's Small Business section to learn more.
Commercial Lease Terms
- Competition: Restricts landlord's right to lease nearby space to businesses similar to those of the tenant's. This clause is usually found in leases of retail space.
- Americans with Disabilities Act (ADA) compliance: A federal law that requires a building to comply with the ADA. Both the tenant and the landlord are responsible for making the property accessible to disabled persons. The tenant should make sure that the landlord makes this warranty based on an ADA survey or an audit performed by an engineer or architect.
- Destruction or condemnation: Requires the landlord to rebuild if the property is destroyed. This clause will specify whether the rent will be abated and whether or not the tenant can terminate the lease if the building is totally or partially destroyed. It will also specify the rights of the parties if the property is taken by eminent domain.
- Enforcement: Specifies how the agreement is to be enforced and who pays attorney fees. Many businesses negotiate a clause into leases requiring the parties to resolve any disputes through either mediation or arbitration.
- Escalation clause: Provides for increases in rent over a specified period of time. Most commercial leases contain escalation clauses. Ascertain how the increase is determined. Is it keyed to actual increases in the landlord's operating costs or to some outside index?
- Expansion: Gives the tenant the right to add adjacent space or to move into a larger vacant space in the building.
- Grace period: Allows the parties a period of time in which to comply with the terms of the lease. This clause may specify the period of time in which the tenant must correct or "cure" a default in the rent.
- Insurance and liability: Specifies who is responsible for casualty and liability insurance and the coverage required.
- Landlord and tenant (lessor and lessee): Identifies the parties by their full legal names, states of incorporation, and principal business addresses.
- Landlord improvements: Specifies which improvements the landlord is to make to the premises prior to the tenant's taking possession of the property.
- Landlord's solvency: Specifies tenant's rights if the landlord is in financial trouble and there is a foreclosure on the leased property.
- Maintenance and repairs: Specifies which party is responsible for the maintenance and repair of which portions of the property.
- Property: Gives a full description of the property being leased. This description should include the suite number, street address, city, state, and zip code. It should also include the number of square feet in the space and the means by which the square footage is measured.
- Purchase option: Gives the tenant an option to purchase the facility at the end of the lease term. This provision should specify not only the option price but also when and how the option must be exercised.
- Rent: States the amount of rent and when and how the rent is to be paid. In this clause, the manner in which the rent is computed should be stated, e.g., flat rent, net-rent, percentage rent, etc.
- Renewal option: States whether the tenant has the option to renew the lease when it expires, the term of the option, and the amount of rent to be paid during the renewal term.
- Right of entry: Gives the landlord the right to enter the premises on an as-needed basis.
- Security deposit: States the amount of the security deposit. This provision should also state what the security deposit will be used for, where it will be held, and whether it will earn interest.
- Subletting or assignment: Gives the tenant the right to sublease or assign the property if the tenant cannot fill out the term of the lease or wants to rent part of its space to someone else. This clause will specify under what conditions the tenant can avail itself of this right. Under a sublet, the original tenant is still responsible for honoring the provisions in the lease. In an assignment, the original tenant is out of the picture and has no further liability under the lease.
- Taxes: Specifies whether landlord or tenant is responsible for the property taxes.
- Tenant "going dark" rights: Gives the tenant the right to close the store or receive a substantial reduction in the rent if a major tenant or several other tenants go out of business, i.e., "go dark." This clause is used mainly when leasing retail space in shopping malls.
- Tenant improvements: Indicates whether the tenant has the right to make improvements to the property and the extent to which the landlord will allow such improvements.
- Termination: Imposes an obligation on the tenant to return the property in a certain condition at the end of the lease.
- Termination date of lease: Specifies the lease's ending date.
- Term of the lease: Identifies in months or years the duration of the lease. It should also state when the tenant is entitled to possession.
- Use of premises: Specifies any restrictions on the use of the premises.
- Utilities and services: Specifies what utilities and services each party is responsible for and the days and hours provided.
- Warranty: Statement by the landlord that the premises are in compliance with applicable laws.
- Zoning: States the zoning laws or other restrictions that apply to the facility.
How a Lawyer Can Help You with Commercial Lease Provisions
Part of getting the commercial lease you need is understanding both what will help your new business and what the terminology means in the short and long-term. An experienced business and commercial law attorney can assist you through the process and help you negotiate.