Why Commercial Lease Terms Need Careful Negotiation

When it comes to leasing commercial property, the devil is often in the details. While residential leases are relatively straightforward and governed by statute, commercial leases are typically customized to address particular business situations. Whether you are a tenant or a landlord, it’s vital to understand the essential terms of a commercial lease and why they demand careful negotiation.

Commercial leases are more complex for a number of reasons. They are often longer-term, with durations of three to five years being common. This means that the lease should address the potential changes that could occur over the course of the term, such as shifts in the market, economic conditions and the parties’ own businesses. Secondly, commercial leases typically relate to the tenant’s business activities. For example, a lease may include provisions covering the tenant’s permissible use of the property, the landlord’s and tenant’s responsibilities for maintenance and repairs, the tenant’s right to sublet or assign and either party’s right to terminate the lease early.

When entering a commercial lease, there are several essential terms that you and your commercial real estate attorney should carefully negotiate. These are among them:

1. Rent structure — Commercial leases often include complex rent structures. Rent may be set at a fixed rate or may be variable, with escalations over the lease term.
2. Lease term and renewal options — The lease duration and any renewal options should reflect the parties’ needs and priorities. Tenants may want the flexibility to renew, while landlords may prefer a longer initial term for stability.
3. Common area maintenance (CAM) fees — These can be a significant expense for commercial tenants. The lease should state how CAM fees are calculated and what areas and services they cover.
4. Use and zoning restrictions — Commercial leases specify the permitted uses of the leased space, which should be consistent with any land use and zoning ordinances.
5. Maintenance and repairs — Commercial leases often place certain maintenance and repair responsibilities on the tenant. Careful negotiation can prevent disputes down the line.
6. Assignment and subletting — Commercial leases may restrict a tenant’s ability to assign the lease or sublet the space. These restrictions significantly affect the value of the lease.
7. Early termination — Some lessors attempt to impose harsh consequences for early termination. The tenant should negotiate favorable terms to prepare for the possibility of breaking the lease.
8. Security deposit and guarantees — Commercial leases may require a substantial security deposit, and landlords may request personal or corporate guarantees to secure the lease.
9. Insurance requirements — Commercial leases often set insurance requirement, specifying the types and amounts of coverage.
10. Dispute resolution — Commercial leases may stipulate how disputes are to be resolved, including whether arbitration or litigation is the preferred method.

H. Clay Parker, Esq. in Orlando advises Central Florida clients on all types of commercial law issues, including lease negotiation. Please call 407-216-2504 or contact us online to schedule an appointment.