Commercial real estate leases differ significantly from residential leases on several points. Before signing one for your New York business, familiarize yourself with the following items.
Commercial real estate includes retail stores, warehouses, multifamily buildings, office buildings and other income-producing properties. Residential properties typically have a one-year lease, but commercial leases often have a three-to-five-year term. However, some lease agreements may be in effect for 20 years or longer.
Assignment and sublease
A company’s need for space may grow or shrink, and if you are uncertain about which direction you’ll go, try to negotiate flexible terms. If the area is not expandable, you might need to relocate if you outgrow your current site. In a case like this, you’ll want to be able to assign or sublet your lease to another tenant.
An assignment transfers your rights to another party, who will pay rent directly to the landlord. In a sublease, the new tenant pays you, and you pay the landlord and retain responsibility for the property.
Types of leases as to payment terms
There are three basic types of leases that differ based on the amount a tenant contributes toward the building’s costs, and regional preferences may affect a landlord’s choice. Rental listings for a commercial real estate property typically state the required lease type.
In a gross lease, the stated rent is the tenant’s flat fee, and the tenant does not contribute anything toward building maintenance or taxes. The stated per-square-foot rent is higher in a gross lease than in a net lease, but the landlord pays the tenant’s utilities.
With a net lease, the tenant will pay a portion of the property tax, property insurance or common area maintenance (CAM) charges. Here are the three types of net leases:
- N: Tenant pays for one of the building costs — property tax, property insurance or CAM fees — in addition to a base rate.
- NN: Tenant pays for two of the building costs in addition to a base rate.
- NNN: Tenant contributes to all three categories in addition to a base rate, usually referred to as a “triple net lease“.
A modified gross lease is a flat fee that includes some of the building’s costs. The tenant may negotiate this fee.
In some retail leases the tenant pays a (usually small) portion of its receipts, usually above a base amount.
Often the rent increases each year by some specified rate or such guidelines as the Consumer Price Index. That should be understood. Very often in addition to such increases, the tenant will be required to share a portion of the increases in real estate taxes and other “common area maintenance” charges.
Default Notices, Late Fees and Cure Periods
Over the course of a lease term there can be situations where paying rent is difficult or impossible. Obviously during the worst of the COVID pandemic many commercial tenants were unable to pay full rent. Sometimes these issues can be addressed. A tenant will want to be notified in writing of any asserted default and given a realistic opportunity to cure.
Options to Renew
After the initial term, tenants often would like the option to renew for one or more additional terms. The rent and other terms in those future years is sometimes agreed to or established by procedures which are agreed to in the initial lease.
Construction and Repair Issues
Getting a space ready for a tenant and future repair issues are often the subject of a good deal of discussion and negotiations.
Building owners often seek to have the principals of a business personally guaranty the payments due under the lease. There are various versions of such guarantees, such as “”good guy” guarantees, limited guarantees, etc. They are extremely important in extending the liability under the lease onto the individuals and should be carefully understood and negotiated.
Commercial leases are extremely complex documents with many complicated and significant issues and terms to be understood and negotiated.
It’s always advisable to ask someone familiar with commercial leases to review yours and offer advice. Remember, these are legally binding long-term contracts involving lots of money. Often the planning for future events is determined and effected by the terms of a commercial lease. Plan accordingly.