Understanding Commercial Lease Agreements

Most business owners prefer leasing commercial property rather than buying because it requires less capital. However, commercial lease agreements can be complicated. The terms of the commercial lease agreement with the property landlord could dictate your future prospects. It is therefore important that you get it right from the beginning. Before you can sign any documents, you need a deeper understanding of what exactly you are getting yourself into.

Commercial Lease Types
There are several different types of commercial leases. Costs also differ from one type to the other. Examples of commercial lease types include:

• Gross lease – for this type of lease, the tenant will pay a set amount as the rent while the landlord will take care of other costs including tax and insurance.

• Net lease – this lease differs from gross lease because the tenant will not only pay rent but he will also cover a portion of other costs such as maintenance, insurance and operating expenses.

• Triple net lease – the tenant pays rent and the entire amount of related costs such as operating expenses, maintenance and insurance. 

• Ground lease – in this case, the tenant leases a piece of land and he can build on it if he so wishes. However, at the end of the lease, any improvements done by the tenant revert to the land owner.

• Shopping center lease – rent paid by the tenant is calculated based on the square footage of the premise. He also has to pay certain charges such as parking lot charge.

Understand the Terminology Used in the Agreements
Before you can sign any document, read through it and make sure you have understood every clause. There are terms that are used in the agreements that are jargon. Familiarize yourself with the terminology to avoid expensive misunderstandings. Below are some commonly used terms in commercial leases:

• Lease term –refers to how long the lease agreement will remain in effect.
  
  
• Escalation – refers to the ability of the property owner to increase the amount of rent paid during the lease term.
  
  
• Premises clause – a provision in the agreement that refers to the space that you will be leasing.
  
  
• Use clause – a provision that states the specific activities for which the leased space can be used.

Non-Disturbance Clause
Typically when a tenant is entering into a commercial lease, he will focus on certain terms of the lease such as the rent, duration of the lease and cost of utilities. He often overlooks certain important issues, one of which is the non-disturbance clause. With this clause in the agreement, you will not be kicked out of the premises if the landlord goes bankrupt within the term of your lease. This clause protects your commercial lease agreement.

It is your responsibility to make sure that the property is suitable for the intended use not just physically but also legally. The above are just a few basic issues relating to commercial lease agreements. The reality however, is that it barely scratches the surface because commercial lease agreements are complicated. To be safe, seek professional assistance and ask whenever something is not clear.