The Basics of Commercial Leases
A commercial lease is a far greater commitment than the everyday residential lease. In fact, this legally-binding document can often make or break a business. For this reason, understanding the fundamentals of this contractual agreement is essential. To help business owners in this area, our team has outlined some key information that one should know about commercial leases before signing.
Commercial Lease Versus Residential Leases
Commercial leases are significantly different from residential leases. First, tenants who sign a commercial lease are not covered by consumer protection laws, which means that business owners do not benefit from items such as caps on the security deposits. Also, there is no standard form that a commercial lease must follow since each one is customized to suit the landlord’s needs. As such, commercial leases are subject to more negotiations between landlords and business owners, a fact which can work in the tenant’s favor with the assistance of a West Palm Beach commercial real estate lawyer. However, the flexibility of commercial leases during the negotiation phase is offset after the lease is signed. Often, commercial leases are long-term leases and cannot be easily modified.
Types of Leases
There are three common types of commercial leases: a gross lease, a net lease, and a modified gross lease. Gross leases and net leases are two separate categories, while a modified gross lease (sometimes called a modified net lease) is a combination of those two categories of leases.
Under a gross lease (also called a full service lease) rent is all-inclusive. The landlord pays for all or most of the expenses associated with the property, including property taxes, property insurance and CAM fees. With this type of lease, rents are often higher because the tenant has fewer additional expenses. Still, a gross lease is the most advantageous for a business owner — since it is the landlord who assumes all the responsibility for the property. This type of lease is typically utilized for multi-tenant buildings.
A net lease offers a lower base rent, but additional charges associated with the usual costs of maintaining the property will be the responsibility of the business owner. The most common net lease is a triple net lease, where the tenant agrees to pay real estate taxes, building insurance and maintenance fees (the three nets). There are multiple variations of a net lease, all differing in what expenses landlords and tenants are responsible for.
Terms to Know Before Sitting Down to Sign
Business owners are likely to encounter some unfamiliar terms when reviewing a commercial lease agreement. Here are a few phrases that everyone should know before signing on the dotted line:
- Escalations – Increases in the rent landlords are allowed to make.
- Lease Term – The full length of the lease, including any renewal options.
- Pro-rata Share – Portion of the total amount of expenses a tenant must pay based on the proportion of total building space leased.
- Base Rent – The minimum rent due each month according to the terms of the lease.
- Common Area Maintenance (CAM) – Charges billed to tenants on top of the base rent. These are usually the maintenance fees of common areas of the commercial property. Services in CAM include utilities, property management, janitorial services, trash collection, landscaping, parking lot maintenance, and so on.
- “Nets” – The three expenses tenants must pay under a triple net lease: property taxes, property insurance, and CAM.
Business owners should not attempt to navigate through the complexities of commercial leases alone. Enlisting the help of an experienced West Palm Beach commercial real estate lawyer will increase your chances of successfully negotiating a commercial lease that will be beneficial to you and your business. Call our team today to find out how we can help you with any of your commercial lease concerns.