Drafting Advice: Commercial Real Estate Leases
Every business today has an office or storefront with some type of commercial real estate lease. There are many important clauses within these contracts and tracking them manually runs the risk of losing money and important information.
There are almost 350,000 businesses in the commercial lease industry generating almost over 500 billion dollars according to IBISWorld. Regardless if you are a landlord or tenant, you don’t want to get stuck missing or owing more money. To mitigate any risk, ensure that your commercial lease agreements include, or omit the following provisions.
Assignments in a commercial lease give the lessee the ability to pass the rent obligation onto another person effectively making the other person/party responsible for pay fees and fulfilling the contract and how it pertains to the commercial property.
It does not discharge the lessee from their duties under the rental agreement but allows them to be shared. The lessee is then responsible for ensuring that the sublessee meets their obligations.
2. Renewal type
Renewal provisions inform terms for the renewal period. Typically, they state whether renewals are automatic and what needs to be done to remove yourself from the renewal obligation, such as a written notice a certain number of days in advance. Don’t forget to manage the dates because you could lock in rent obligations for another year or more.
3. Change of control
Change of control occurs when a property gets sold. This provision informs the tenant that under the new owner they may be asked to relinquish their tenancy. As a business owner, the disruption can be costly. See if you can find a way to leave this provision out of an agreement or ensure that enough time would be allotted to find additional space.
4. Force Majeure
Force Majeure has become one of the most searched for clauses in lease agreements due to COVID-19. This clause describes who is responsible or who can get out of financial responsibility in the event of an ”˜act of god’ or a ”˜natural disaster’ like a war, hurricane, tornado, or wildfire. If your business is in trouble and you are having challenges covering rent, look for language such as pandemic, quarantine, epidemic, etc.
A termination clause allows for the ending of a contract early, before the set term date. Cause for termination usually occurs when a tenant damages the property or makes major changes to the property without the consent of the property owner. Another type of termination in a lease is a termination for convenience which would allow either party the option to cancel at any time. This is beneficial for lessee’s who get the option to terminate a lease if their business is underperforming without any penalty.
6. Gross Sales Termination Clause (Important for restaurants)
For restaurant owners, the gross sales termination clause protects them from rent obligations if they are unable to meet gross sales to support their business. The tenant and landlord agree on a projected amount of gross sales, over some time, that ensures the tenant can meet the financial requirements to remain at the location. If not met, the tenant has the option to terminate the lease without penalty.
7. Co-tenancy (Important for retail)
If you’re a business owner, don't forget to pay attention to the co-tenancy clause. This provision allows you to reduce your rent if your traffic is negatively impacted by the absence of a major retailer like a department store. While great for a tenant this one does hurt landlords. If you are a landlord, try to insert language that will prevent the tenant from defaulting on the lease, and that they must show evidence of a loss in sales directly related to the loss of the store.
There are a lot of different lease types such as single net lease, double net leases, triple net leases (NNN leases), modified gross lease requiring tenants to pay a base rent, full-service leases, percentage lease, and so on.
Depending on the type of lease many obligations such as property tax insurance, operating expenses and costs, common area maintenance can full under the responsibilities of the tenant. Comprehensively understanding and outlining these areas effectively are essential for landlords to draft airtight contracts.
Effectively managing contracts and clauses for medium to large businesses requires with a paper-based system presents a number of potential issues all of which can be mitigated with an automated system.
Contact Evisort today and learn more about how artificial intelligence powered automation can trim costs, improve efficiency, and bring your business into the future. Learn more about creating contracts and contract templates here.
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