Commercial Real Estate - Leases

Many commercial real-estate transactions involve the rental of industrial buildings, offices, or retail space. There are a number of issues that affect commercial entities that do not apply to residential renters. In addition, there are also different financing models for businesses that depend on where the business is located. These issues will be briefly outlined below.

In its most basic form, a lease is a contract to use real estate or property for a specified period of time. A commercial-lease agreement includes an offer from the property owner and an acceptance from the renter, with terms usually revolving around the length of the lease, price for renting the property, and maintenance. The written lease provides documentary evidence of the agreement.

If you are faced with commercial real-estate issues, it is best to consult an attorney for detailed information pertaining to your individual situation. A real-estate lawyer would be an excellent resource for you.

Lease Structures

Most commercial leases are definite-term leases, meaning that the lease is of a specified duration, usually measured in years. Commercial leases are generally developed through negotiation and differ from residential leases in that there are fewer statutory controls over the content and terms of the lease. Residential leases are open to judicial scrutiny for shortcomings in basic living requirements, such as violations of the implied warranty of habitability, a common component of residential leases. Commercial leases are presumed to have been entered into by knowledgeable businesspeople who carefully negotiate all aspects of their leases. This means that courts are less likely to review commercial leases than residential leases.

Shopping Centers and Malls

The commercial-lease structure for shopping centers and malls is somewhat different than the structure of leases on single freestanding buildings. When a commercial entity leases space in a shopping center, the lease contract will often include collateral costs. These collateral costs include payment of property tax, common-area maintenance, and contribution of a set portion of gross sales.

Negotiation of Leases

There are a number of matters that should be addressed in lease negotiation:

• Ability to sublease or assign lease. For example, if a retailer leases a large space it may be to its advantage to sublet portions of the property.
• Negotiable rent. An alternative to a lump-sum rent payment would be payment of a portion of gross sales of the commercial tenant. This could be a profitable feature to either the landlord or the lessee, depending how sales fluctuate.
• Amount of maintenance. If the lessor is receiving a portion of gross sales, then there might be room to agree on a smaller contribution to common maintenance.
• Ability to withdraw from lease under certain circumstances.
• Term of the lease. The term is the length of time the lease represents.

Conclusion

Commercial leases are typically fluid and open to negotiation, allowing for greater freedom in terms than residential leases. Commercial leases can flexibly accommodate the business needs of both parties. However, the negotiation process can introduce greater complexity than a standard residential agreement. For this reason, potential buyers or lessors should be aware of the basic issues presented in this article and should contact an attorney in the event that additional questions arise. A commercial real-estate attorney can help you to explore your legal options.

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