If you own commercial real estate space and want to rent it, it’s important that you protect yourself and your business, and that you understand your obligations to your tenants, as well as what they can legally expect from you as a commercial landlord. A commercial lease agreement is very different from a residential lease and it’s important that you understand how these differences will impact you as a commercial landlord. Working with an experienced commercial real estate attorney can help.
A commercial lease agreement is often a complex document that is specially tailored to your and your tenant’s unique situation. There is no such thing as a “standard” commercial lease agreement, and most commercial leases can and should be negotiated. For this reason, and because most contracts will be interpreted in favor of the tenant, if you intend to lease commercial real estate it’s important that you work with an experienced commercial real estate attorney.
As you consider negotiating a commercial lease with a potential tenant, be very clear about what is and is not included in the rental agreement. Be explicit about common areas like hallways, restrooms, entrances, elevators, and parking areas.
Also, be clear about what area is being rented. Many commercial leases include both the total and usable square footage. This can help when it comes to negotiations about price per square foot, whether the rental price is fair, and what uses will be permitted within the space.
Rent, of course, is possibly the most common concern when negotiating a commercial lease.
Many commercial real estate agreements include rent escalations at certain intervals, such as when the lease will renew.
If you with to increase rent over the course of the lease, be clear in the commercial lease agreement about when and how much rent will increase.
Most commercial leases are between business entities, which is to say that your company is a corporation, partnership, or LLC and it leases commercial real estate to another corporation, partnership, or LLC.
But for tenants who own small businesses, it can be wise to get a personal guarantee from the business owner or owners. A personal guarantee reduces the landlord’s financial risk and guarantees that someone will be responsible to continue to make lease payments, even if the business fails.
At the beginning of a commercial lease, everyone assume that there will be no problems between a landlord and tenant. However, disagreements can and do arise, and it’s best to understand the framework for how disputes will be resolved before your tenant sign the commercial lease agreement.
Litigation is always one way to resolve a dispute about a commercial lease, but it can be expensive, risky, and unpredictable. Therefore, many commercial lease agreements include mediation or mandatory arbitration clauses to address disagreements between landlord and tenant.
It’s important to specify a process for a tenant to air any grievances before formal dispute resolution. This can avoid costly legal proceedings, and keep all parties to the agreement happy.
Many tenants will want the option to sublet the commercial property. As a landlord, it’s important that your lease agreement is clear about whether subletting is permitted, and whether a tenant must obtain your permission to sublet the premises.
If you want to retain the ability to consent to a sublease it is important that you are fair to the tenant and not act unreasonably when it comes to subletting decisions. You may wish to include conditions that the sublessee must meet in order to qualify for a sublease, such as the sublessee’s financial health, or how the new tenant will use the property.
Many tenants will want or need to make modification to the commercial real estate to use it for their intended business purpose. A well written commercial lease agreement should state who is responsible for maintenance and repairs, both within the leased space as well as in common areas.
Most commercial lease agreements require that the tenant pay for normal repairs and maintenance within the leased space, while the landlord remains responsible for structural issues and common areas. Depending on the nature of the repair you may wish to retain the ability to assess tenant’s for major repairs to the building.
You may also wish to include a clause that the tenant return the space to you in its original condition. It can be beneficial to carve out exceptions for normal wear and tear, or for the tenant to return the premises or with any alterations that were approved by the landlord.
Be clear about your expectations as they relate to signage and advertising, especially when it comes to size, location, content, and appearance. You may also wish to specify how the work will be performed if, for example, your building has an expensive facade that you do not want a tenant to drill into.
Terminating a commercial lease early can be a risky exercise for a landlord, as courts often grant the tenant relief from forfeiture clauses and may even award the tenant damages if the lease was terminated without sufficient cause. Your commercial lease agreement should include conditions for early termination, and also indicate whether the lease will renew automatically, and how and when the tenant should notify you if they intend to terminate the lease.
A commercial lease agreement is a complex document. Large sums of money and years of profitability are at stake. North Dakota commercial real estate attorney Leslie Thielen is here to help move you forward.
Contact the North Dakota real estate attorneys at Fremstad Law today by calling (701) 478-7620.
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