Commercial leases are often lengthy, full of legal jargon and difficult to understand. The leasing of commercial premises is becoming an increasingly complex area of law as the evolving business landscape continuously gives rise to new legal issues. One unfortunate reality that remains constant, however, is that people often sign a lease or offer to lease without realizing what in fact they are agreeing to. This is particularly true for tenants, who are typically at a disadvantage when it comes to negotiating the terms of a commercial lease.
What is an Offer to Lease?
It is common practice for parties to enter into an offer to lease prior to signing a lease agreement. An offer to lease forms the commercial basis for the terms and conditions of the lease itself. Many people are surprised to learn that, unless it expressly states otherwise, the offer to lease is generally considered to be a legally binding contract on the parties. It is therefore important to ensure that the offer to lease is in accordance with the parties’ commercial arrangement, and further, that the subsequent lease agreement accurately reflects the terms agreed under the offer to lease.
What should I look for in my Commercial Lease?
One particular area to pay attention to is that of operating expenses. In addition to the basic rent, a lease agreement often accounts for the payment of additional rent for costs associated with the operation, repair, and maintenance of the building and any common areas. Commercial leases can take on many different forms, each of which vary the degree of such cost allocation amongst the parties. Deciding on which option is most suitable for you will depend on many factors, including the nature and needs of your business, the space or premises being leased, and whether you want more or less control over property expenses.
What are the Different Forms of Commercial Leases?
Some of the most common types of commercial leases include the following:
- Absolute Net Lease: This form of lease generally shifts all of the operating expenses to the Tenant, including those related to insurance, taxes, utilities, maintenance, cleaning, roof replacement, and both minor and structural repairs. This is common where a tenant rents an entire freestanding commercial building.
- Triple Net Lease: In this case, the Tenant bears the risk of rising expenses under three general categories: real property taxes, building insurance, and maintenance costs. The Landlord is typically responsible for maintaining the roof and structural elements of the building, particularly if it is multi-tenanted.
- Modified Gross Lease: Conceptually, this option falls somewhere in the middle of the spectrum. The Landlord manages certain elements of operating the property, such as exterior and common area maintenance, and pays the real property taxes and building insurance. Just as in a Triple Net Lease, the Tenant still takes responsibility for its own utilities and interior janitorial and maintenance (such as HVAC). The tenant pays a relatively predictable rental rate under a Modified Gross Lease, which as a result may be higher (but not necessarily) than it would be under a net lease structure.
- Gross Lease: Also known as a Full Service Lease, this is considered to be the most tenant-friendly type of lease, because it requires the landlord to pay most or all of the ongoing expenses associated with the property. Some exceptions might be telephone and data expenses. It is not surprising, however, if the Landlord charges a premium to the Tenant on the rental rate under this form of lease. This type of lease may be common in large, multi-tenanted office buildings where it may otherwise be too impractical to apportion expenses amongst the tenants.
While this describes some of the typical provisions found in different lease structures, the terms and conditions of any commercial lease should be customized to suit the Landlord and Tenant. Despite the terminology used to categorize a particular lease agreement, it is important not to make any assumptions based on a general categorization. The key takeaway is to carefully review the terms under the lease agreement to properly understand the obligations and expenses for which each party is responsible.
If you are planning to enter into a lease for commercial space, our business lawyers can help you. Whether you are a landlord or a tenant, having a strong lease in place is the key to limiting your business from any undue liability. Our experienced lawyers are familiar with the common traps that could unduly expose you or your business to liability, and we understand that there may be unique risks associated with your nature of business. Our priority is to protect the interests of your business both currently and as it evolves over time.
We provide legal services in the areas of office leasing, retail leasing, industrial leasing, ground leasing and lease terminations. Whether it is drafting, reviewing, consulting or negotiating on your behalf, we can help you get the most out of your commercial lease arrangement.
Contact one of ATAC Law’s lawyers today to discuss your commercial lease.
