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Essential elements of a commercial lease agreement

On Behalf of | Jun 7, 2021 | Real Estate Transactions |

Business owners usually enter into a commercial lease agreement with the intention of expanding operations as the business grows, and thus will prefer to rent rather than purchase property, as this requires less capital. It is important to understand, however, that commercial leases have complexities that make them very different from residential leases.

For example, commercial leases do not benefit from consumer protection or landlord-tenant laws. Where residential leases usually last a year, commercial leases can be much longer. And because each client’s needs are different in a commercial lease and the terms are highly negotiable, it is essential for the business owner to be aware of how all elements of the transaction will suit the needs of the business.

When beginning the negotiation process, California business owners will benefit from an attentive review by experienced legal professionals of all contractual aspects that cover the terms, conditions, cost as well as length of the lease.

Negotiating suitable terms for the business

There are important elements that should be present in a commercial lease agreement in order to allow flexibility for the unique needs of the business:

  • The rental amount and increases should be clearly articulated in the terms. As these are usually calculated by square footage, negotiable terms may include property taxes, utilities, insurance and repairs. Other negotiable elements are the annual percentage rental increases and caps on these.
  • The amount of the security deposit and its return should be clearly written in the contract.
  • Any modifications to the space should be outlined in the agreement, including which party will make the improvements and whether or not the space must be returned to its original condition at the end of the lease.
  • The agreement usually contains use and exclusivity clauses that spell out what activity is allowed on the premises, thereby reducing liability for the property owner. Business owners may wish to negotiate a broad usage clause, and angling for an exclusivity clause as well will bar the property owner from renting out space to a competitor.
  • The business owner should negotiate for the right to assign or sublet the space should the business relocate or become less profitable
  • Because the Americans with Disabilities Act (ADA) requires any business with more than 15 employees and open to the public to be handicapped-accessible, there should be terms outlining the responsibility and financial obligations of the party making alterations.

As in any business transaction, it is important to understand and negotiate the key provisions in a commercial lease agreement to ensure a satisfactory outcome.