Key Clauses in a Lease

Here are some suggestions for how businesses can protect themselves in leasing property. A lot of these tips would also be helpful to tenants considering residential leases.

Remember, if you’re not happy with clauses in a lease you’re asked to sign, you have the right to negotiate with the other party and try to make the provisions more to your liking. If the other party agrees, write in the changed language, and have both parties initial the revised clause.

As always, your lawyer is your best source for information and assistance about the particular lease you are considering.

The Basics
The lease should state the term of the lease both by months and by date. It should state the full name and legal address of the property, owners, and management company. For a commercial lease, it should give the exact size of both the building and the space to be rented, in square footage. Find out how the space is measured to prevent surprises later on. Or ask the landlord to make an “exhibit”-a diagram of the space showing dimensions-part of the lease.

In a commercial lease, you’ll want to know how many parking spaces are provided per thousand square feet. Are there designated parking spots that go with your property? Who pays the costs for maintaining the parking lot? Whatever the cost to you for parking spaces-even if it’s free-put it in the lease and make sure the price of parking is fixed for the duration of your lease. Just because parking is free now doesn’t mean it’s going to be free in five years.

Security Deposit
If you are required to make a security deposit, try to have the initial security deposit reduced during the term of the lease. If cash is not available, talk to your broker about having a letter of credit issued to cover the security deposit.

Stipulate that the landlord must return this to you within thirty days after the lease terminates, unless you are in default. State that the landlord must return the full security deposit, minus the costs to repair any damage other than normal wear and tear. The lease should address whether your security deposit will be collecting interest, and whether you or the landlord keeps the interest. Laws regarding interest on security deposits vary from state to state.

A commercial lease will most likely require you to state how you will use the space. Be as general as possible. Being too specific will prevent you from possible expansion in the future, or subleasing extra space. Avoid the words “solely,” “only,” and “for no other purpose.” “Primarily” and “principally” will give tenants greater leeway, but should be avoided if possible.

In some types of business it is important to have a provision in the lease prohibiting the landlord from leasing space to a competitor. If the landlord will not agree to this, include a provision stating that space leased to any competitor must be located on a different floor or in a different wing of the building.

Option to Renew
Always include a renewal option. This will give you the right to renew your lease for one or more additional terms and may be based on the fair market value of the property at the time of renewal. The key here is to come to an agreement with the landlord as to the definition of fair market value or on the formula for how the future rent will be determined. You will be required to notify the landlord in writing within a specified time period if you wish to renew your lease. Without this option, you could be forced to move or pay higher rent to remain in current location.

Option to Expand
An option to expand will give you the option of leasing additional space and will determine how the rent for that space will be calculated. This way you can lease only the amount of space you need right now with the protection of being able to increase the amount of space when and if it is needed. The advantage is that you are not obligated to rent the additional space unless you want to. The disadvantage is that there is no guarantee the additional space will be available when you want it.

Terminating the Lease
Smart tenants insist on a termination clause. This allows you to cancel your lease if your business suffers a significant decline in trade or business. Do not take this right lightly.

This provision could cause some difficulties. It will allow the landlord to audit your books and records to determine if indeed you have suffered a significant decline. You will probably be required to pay the landlord’s out-of-pocket costs, such as the tenant improvement allowance and legal fees. In addition, you will no doubt be prohibited from leasing space for a similar purpose in your geographic area for the remainder of your lease. If you do lease new space during that time, this clause will most likely give your former landlord the right to collect the rent you would have owed had you stayed.

Nonetheless, if it gets you out of a lease that is no longer profitable for you, the hassle will be well worth it.

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