As a business owner, you will likely enter into a commercial lease agreement at some point. Whether you’re negotiating the contract yourself or using an agent, knowing what terms should be included and the implications they have for both sides is crucial to ensuring positive relations between you and the other party going forward.
Below is a list of elements that are essential to any lease agreement and some points of consideration for each one.
- Parties Clause: Commercial leases should always begin by naming the landlord and tenant completely and correctly. This means that you must use the full legal name of your business and include its designation, such as corporation, LLC, LLP, etc. If you are in the process of forming the business, there must be a proper identifier (e.g. Jim Smith, on behalf of a limited liability company to be formed, …) for the lease to be enforceable.
- Premises Clause: The premises being leased must be correctly identified. If you will be occupying an entire building a street address will suffice, but if your tenancy is restricted to an office or room, that space needs to be described along with any other areas you will have access to, such as kitchens, storage rooms, and parking. If the building is under construction, the lease must include provisions for identifying the premises once they are built.
- Rent Clause: The monthly rent payable for the building or space must be clarified along with other possible expenses. Many rent clauses have two components: base rent, which is typically a rate per square foot, and ‘percentage rent’, which is a percentage of your gross sales. Some rent figures include common area expenses and even tenant improvement allowances. To be legally binding, the lease must clearly explain how these totals are calculated.
- Term Clause: This section states the beginning and ending dates of the lease. It also includes rent due dates and specifies when certain events and components, such as business opening and insurance, will take place. If the beginning date is unknown at the time of signing, the clause should specify how commencement will be determined (for example, 30 days after the tenant receives notice that the premises are ready for occupancy).
If you are signing a retail lease agreement, request that the term clause be supplemented by a bail-out option, which releases you from the lease if your sales fail to achieve an agreed-upon amount, or co-tenancy clause so you can move out if an anchor business in the building leaves or goes out of business.
- Use Clause: This clause specifies exactly how you can use the space. For example:
- What kind of business you can run
- What products or services you may offer
- How you will use the space
Before signing, make sure that the use clause is compatible with your business needs and plans.
If you are preparing to enter into a commercial lease agreement, the Auricchio Law Offices can provide you with experienced legal counsel. We have an in-depth understanding of commercial real estate issues and will help you achieve a result that allies with your business goals. To schedule a consultation, call 312-263-0010 or contact us.
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