Whether you’re a landlord or a tenant, an important step in negotiating a great commercial lease is to partner with an experienced broker that specializes in your industry. They can help you to define the basic parameters of your lease—and, most importantly, help you to determine and negotiate a fair, market-appropriate rental rate for your space.
Next, you need to dive deep into the various terms and provisions that are set forth of the lease. Keep in mind that a commercial lease creates a long-term relationship between a landlord and tenant–one that can last 5-10 years or more. So, understanding exactly what you’re signing up for is a critical step in the process.
Some of the most important items to consider are the various ways that lease expenses (other than the base rent) can be split between landlords and tenants. These expenses generally include property insurance, property taxes, and maintenance fees for the common areas of the shopping center (sidewalks, lights, landscaping, security, etc.). Most tenants pay a prorated portion of some or all of these expenses, under one of the following structures:
Single Net Lease (aka Net Lease)
The tenant only pays for utilities and property taxes for its portion of the building. The landlord pays for all maintenance, repairs, and insurance.
Double Net Lease (aka Net-Net Lease)
The tenant pays for utilities, property taxes, and insurance premiums for its portion of the building. The Landlord pays for all maintenance and repairs of the building.
Triple Net Lease
The tenant pays for all costs for its portion of the shopping center (non-structural repairs, maintenance of the leased space, common area maintenance fees, insurance, and taxes). The landlord only pays for structural repairs to the leased space and the building.
Full Service Lease (aka Gross Lease)
The tenant only pays the base rent, while the landlord pays for all additional expenses. (This usually means that the landlord has estimated the cost of the additional expenses and included those expenses in the base rent.)
Now that the basic lease structure is in place, it is absolutely critical that you review each provision of the lease. Keep in mind that your lease can last for 5, 10, or even 20 or 30 years. You need to think through and address all of the major issues that can arise in such a long period of time. A few major questions to keep in mind:
- Are there competing businesses in the shopping center? If so, how will they affect each other, positively or negatively?
- Does the lease include an improvement allowance? If so, is the amount of the allowance reasonable?
- Can the tenant assign its lease or sublet its lease to another party? Why, or why not?
- Should the tenant be required to personally guaranty the lease?
- What happens if either the landlord or the tenant does not uphold its obligations under the lease?
- What happens to the lease if the landlord wants to sell the shopping center?
TLC helps clients to navigate these questions, work towards viable solutions, and negotiate a fair deal for all parties.