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Commercial real estate lease clauses to know

Commercial real estate leases are often lengthy and dense. Ideally, they protect the owner’s and lessee’s interests. These contracts will identify the usual basics of the exact commercial property the tenant will occupy, the length of the agreement with start and end dates, and the amount and date of the payments.

Other key clauses

There is also a list of other clauses in these contracts that can also be quite important. Examples include:

  • Lease extensions: The lease may contain a provision or option for the tenant to renew the lease at a specific rate. These allow the tenant to extend if they so choose and may improve the appeal of the base term agreement.
  • Payment and reimbursements: A net lease involves paying a portion of the property’s operating expenses. A gross lease generally has a lower rate, but the tenant has a proportional share of the maintenance. There may also be a security deposit or rental increases at regular intervals.
  • Permissible uses: There will be specific language regarding allowed and prohibited activities. Violations can address civil and criminal laws. The clause may also address business activities, such as restricting the shopping center to one clothing store.
  • Co-Tenancy: This clause addresses the occupancy of other tenants, particularly larger ones. For example: If the building’s largest tenant leaves without being replaced within a period of time, the coffee kiosk in the lobby may have options to renegotiate or change its lease.
  • Default: Tenants who miss payments violate their agreement. After a certain number of missed payments, the tenant defaults. This clause can apply to issues besides rent, such as improper activities or space upkeep. Repercussions can be minor or more severe.
  • Improvements: Tenants with long leases often have specific needs or make improvements to suit their needs better. The owner may give full or partial credit for improvements that increase the property’s value.
  • Sublease: Not all businesses who sign a lease survive, or perhaps they grow and need a larger space. They may want to sublet the old space to a new tenant, but the owner will likely want the power to approve or deny it.

These issues matter

Property owners and tenants need to review and update their leases to ensure that the contract accurately represents the property, its value and its use. Failure to do this can mean not addressing the shifting marketplace and economy, which is a bad deal that may cost clients money.