Negotiating a Commercial Lease

Posted on Thursday, August 09, 2018

A commercial real estate lease, like any other contract, can be negotiate.

But don't use or accept a form lease. The lease should be constructed in a way that you obtain the  maximum legal, economic and tax advantages.

Keep in mind that any ambiguities in the lease are usually construed by the courts against the person who drew it — in many cases, the landlord. 

Get qualified legal advice before signing any contract. To fully and adequately protect your rights, here are eight important considerations in a lease:

1. A tenant can move in and start paying rent after:

A certificate of occupancy has been issued,
The premises are ready per specifications and plans, and
Only minor details of construction, decoration or mechanical adjustments remain to be completed.

2. If possession is delayed through no fault of the tenant, what are the remedies? They might include:

Rent abatement,
Money damages,
Cancellation, or
Reimbursement of prepaid deposits.

3. Rent should be stated as either:

Flat rent,
Step-up rent (gradual increase in rent),
Percentage of gross sales, or
Base rent plus percentage of net sales. 

In some cases, renters also use an "expense-participating lease," which involves fixed rent plus a share of real estate taxes, insurance and certain repairs.
4. Periodic rent increases should be specified according to one of the following methods:

Operating expenses (pro rata share),
The consumer price index, or 
 Fixed percentage with a maximum cap on the increase.

5. Specify whether the landlord or the tenant provides and pays for heating, ventilating, air conditioning, electric lighting, water, janitorial service, security and snow removal. 

6. Describe a tenant's right to remove trade fixtures. What about alterations owned or paid for by the tenant, such as improvements made at the beginning of the lease? 

7. Is there a warranty by the landlord that any use, storage, treatment or transportation of hazardous substances on the premises is in compliance with all applicable federal, state and local laws, regulations and ordinances? In addition, the landlord should include a warranty that no release, leak, discharge, spill, disposal or emission of hazardous substances has occurred on the premises. 

8. Is there a statement about the presence of hazardous substances on the premises before the tenant took occupancy? The landlord should agree to indemnify and hold harmless the tenant from any claims, damages, fines, judgments, penalties, liabilities and costs incurred because of an investigation of the site or any clean up, removal or restoration mandated by federal, state or local agencies.

These are only a few of the many issues involved in a commercial lease. Before signing, it is important to understand the terms contained in a lease, and also the legal and tax implications of those terms.

Posted in Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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