by Jon Austin
A commercial real estate lease is intended to capture the long-term relationship between a landlord and tenant, so it is important for both parties to ensure the lease rightly captures their intent. It is beyond the scope of this article to discuss every key provision within a lease. However, we want to point out a few terms both parties will often give extra attention to in the negotiation process.
- Rent. Tenants need to ensure they understand whether the quoted rent amount is the total amount of rent due or merely the "base" rent amount. Many leases require the tenant to pay a base rent plus the tenant’s pro rata share of the landlord’s insurance, taxes and maintenance costs. It is important for both landlords and tenants to know how rent is calculated, whether it is subject to increases over the life of the lease, and then budget accordingly.
- Commencement Date. This date is generally a trigger for the first payment of rent, but it also can lead to a possible default if either the landlord is unable to deliver the leased space or if the tenant does not take possession by this date. Therefore, both parties need to have a firm understanding of when this date occurs (especially if the date can occur within a certain range as opposed to a date certain) and the impact if someone is not ready by this time.
- Use. The parties will often want to clarify on the front end what the tenant’s expected business will be. This is often an important term in a retail setting due to the competing nature of businesses in a shopping center, but it is still important in an office building as a landlord may want to manage its overall mix of tenants.
- Scope of Common Area Maintenance. The "common area" is that area within a building or complex that is generally not leasable, but rather is shared (or common) among all tenants and their customers (e.g., parking lots, hallways, restrooms, elevators, etc.). While the landlord is responsible for operating and maintaining the common area, it will also look to pass these costs through to the tenants. Both parties want to make sure the lease clearly defines what is included within this definition and how these costs are calculated on an annual basis.
- Indemnification & Insurance. Unfortunately, people make mistakes and injuries happen. Therefore, it is important both parties have fairly allocated responsibility and risk, and have required sufficient insurance to be in place if needed.
As noted above, this list is not exhaustive and other factors (such as, breach/remedies, shopping center restrictions, and the ability of a party to assign the lease) may be more important than others depending on the circumstances, location, and parties involved.
Whether one is landlord or tenant and regardless of the type of lease, both parties need to be mindful of the variety of issues at play in negotiating and drafting their lease and the impact these terms can have on the success of their business operations for years to come.