Four Basic Commercial Lease Provisions All Landlords and Business Owners Should Understand:
By Attorney H. Robert Fischer, III
The recent economic hardship faced during the pandemic has caused the widespread inability of tenants to pay rent or to fulfill other obligations. This has precipitated a recent storm of legal battles between commercial landlords and their business owner tenants. Parties to commercial leases of all kinds have been forced to draw their leases under the microscope like never before. Through this, there has been one hard-learned lesson: the value of commercial property to an investor or a business truly depends on having a solid, well-drafted lease that adequately protects their interests.
Commercial leases can be very long and dizzyingly technical. Because of this, to the untrained eye, it can be hard to decipher what exactly is being agreed to during negotiations. Though these technicalities can most assuredly make you or break you, so to speak, in a lease dispute, there are some important big picture questions that every party to a lease should ask at a minimum:
1. What type of lease are we dealing with? Different types of leases may divide certain financial obligations in different ways. Though there is variation within each, the general types of commercial leases are as follows:
a. Single Net Lease: The tenant will pay rent, and their pro-rata share of the property tax, as well as utilities. Landlord covers costs associated with the building, such as maintenance.
b. Double Net Lease: Identical to a Single Net Lease, except tenant may pay a portion of the property insurance.
c. Triple Net Lease: The tenant will pay rent, and at least their pro-rata share of, and possibly all of the taxes, insurance, and maintenance of common areas.
d. Gross Lease: The tenant will pay a fixed rate that may cover the projected cost of utilities, maintenance of common areas, property taxes and other expenses.
2. Who pays for the buildout? Often, a property does not come perfectly suited to a tenant’s business needs. Instead, the tenant may require extensive certain renovations be completed to retrofit the property. The landlord may agree to cover the cost in full or in part. Further still, the landlord may agree to hire contractors to see that buildout is completed. In either case, who does what and by when needs to be stated with precision to avoid delay and dispute.
3. Who is responsible for repairs and maintenance to the property? The best way to ensure each party is informed of their responsibilities is to have clearly delineated duties. Who is responsible for maintenance and repairs to the interior or exterior? How about structural repairs like a roof or foundation? These questions can be center of many landlord/tenant disputes and are best addressed in the lease before any problems arise.
4. Does the landlord or tenant carry the insurance? Landlords often require business owners to carry commercial rental insurance so that they will not need to pay out for certain accidents or injuries that might arise from the business owner’s conduct. The types of insurance a landlord may require a tenant purchase might include:
a. Commercial general liability insurance: This covers basic risks such as repair or replacement of damaged or stolen property.
b. Business interruption insurance: Provides coverage during certain types of temporary shutdowns so that the business can cover lost revenue and rent payments.
c. Flood Insurance: Some business insurance policies exclude flood coverage, and a landlord may insist that a separate policy be purchased.
Whether you are a landlord with investments in commercial property or are a business owner who has found a potential rental space, the attorneys at Walters & Galloway, PLLC are here to guide you through the drafting and negotiation process, with the goal of effectively negotiating your position while minimizing your risk of unnecessary and costly litigation.
