Aug 06, 2018

Top 5 Commercial Lease Clauses You Should Know

By Don Catalano


Top 5 Commercial Lease Clauses You Should Know
Commercial leases are lengthy documents and can be overwhelming to peruse; however, it's important that you carefully read over every section to ensure that you understand the agreement. Particularly, pay attention to these key clauses:


1. Rent Escalation Clause

Most commercial leases will have a rent escalation clause that spells out how and when your rent will increase during the term of the lease. Escalation clauses may specify a fixed amount for an annual or biannual increase or go into effect when the landlord's taxes, insurance, operating costs and maintenance costs increase. Other times, rent escalation is based on the consumer price index or other inflationary indices.


2. Sublease Clause

A sublease clause gives you the ability to turn over all or a portion of your space to another tenant. This clause can protect you from having to continue to pay rent for unused areas of your office space or from having to terminate your lease if you need to relocate or shutter your business. The clause will stipulate what process you must undergo in order to sublease your space. Landlords typically do not like sublease clauses, so you may need to negotiate for favorable terms.


3. Use and Exclusive Use Clauses

The use clause in a lease tells you how you can utilize your space. It may restrict your lines of business, stipulate office hours that you must adhere to and place restrictions on advertising signage on the premises. Make sure that you understand what limitations will be placed on your business due to the terms of the use clause.


Exclusive use clauses guarantee that no other business in your industry can occupy space in the building and can protect your company from having to be neighbors with a competitor. Normally, only well-established tenants or tenants that occupy large portions of buildings can negotiate for exclusive use clauses.


4. Improvements and Alterations Clause

This portion of a lease explains what improvements will be made to an office space before your company moves in and who is responsible for the cost of those improvements. In addition, the alterations section explains what rights you have to make changes to the space going forward. You may need to submit a written request to make any or certain alterations to the space.


5. Renewal Clause

The renewal clause explains what steps you need to take to renew your lease at the end of the term. In some cases, you may need to notify the landlord of your intent to stay within a certain period of time. Alternatively, you may only need to notify your landlord if you intend to vacate the space.


Additional Tips for Commercial Leases

Because commercial leases are so complex, it's a good idea to have yours reviewed by a real estate lawyer and a tenant representative broker before you sign. Don't be afraid to ask for clarifications and make sure that you check the entire document for accuracy. Consider the commercial lease that you are presented with as a first draft. If the language is unclear, a mistake has been made or a term is a deal breaker, request changes or negotiate with the landlord.


Here are a few other articles to check out:

Lease Terms That Give You Options

The Top 5 Commercial Real Estate Myths

8 Commercial Real Estate Terms You Should Know


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Don Catalano

Don Catalano