Oct 14, 2014

Understanding Basic Commercial Real Estate Lease Clauses

By Don Catalano


Commercial Real Estate Lease ClausesCommercial real estate leases are complicated legal agreements that have their own specialized language. While it's always a good idea to have a tenant representative to help you out, you can also help yourself a great deal by understanding a few basic lease clauses.

Space Measurements

Commercial real estate properties are typically rented out on a rentable square foot basis. A space's actual size based on its dimensions make up its usable square footage. The rentable area is equal to its usable area plus a pro-rata share of the building's common areas. The upshot of this is that if you find a 40-by-80 foot space, you won't pay for 3,200 square feet. You'll pay for more.

CAM and Reimbursement Clauses

Many leases will require you to pay some or all of the building's expenses in addition to your base rent. Triple net leases typically require you to pay your share of all of the building's operating expenses while agreements with full service or gross lease clauses have the landlord paying all of the expenses. Many also fall in between the two extremes. Frequently, the reimbursements you pay will be referred to as common area maintenance or management costs. Usually, they are abbreviated as CAM.

Rent and Escalation Clauses

While you might pay your space's face rent for the first year, one of the most common leases clause is an escalation clause. This allows your landlord to increase your rent periodically based on a set metric without having to renegotiate. If your agreement includes one of these clauses, you will pay more for your space over time while you occupy it.

Renewal Clauses

One of the most favorable lease clauses you can negotiate is a renewal option. This language gives you the right to extend your lease on a pre-negotiated basis. They give you the benefit of a long-term lease but still let you get out of the space if you need to after your initial term expires. If possible, look for language that spells out how much the rent will go up in the option period so that you can have a higher degree of certainty.

Assignment and Subletting Clauses

Sometimes, a space won't work out for you. Typically, a lease is a binding agreement that requires you to pay rent until its end, regardless of whether or not you are actually using the space. However, lease clauses that allow subletting gives you permission to find another tenant to occupy your space for you and pay rent, reducing or eliminating your expense. Assignment clauses can let you walk away from the lease (to varying degrees) completely, provided you can find a replacement.

Because laws and customs vary greatly from market to market, knowing the basics about commercial lease clauses is just a first step. Having expert representation can help you to not just understand what the clauses mean, but what they should actually read.

Other great Commercial Lease articles:

Commercial Lease Renewal Myths... Busted!

Protecting Yourself from Signing the Wrong Office Lease

Parking and Your Office Lease



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Don Catalano

Don Catalano