Before You Sign a Commercial Lease: Four Areas to Consider

Before you sign a commercial lease: Finding the right property for your business can be a complicated and time consuming process.  After finding the right tenant’s agent, searching properly-zoned locations and short listing several properties for your business, there are four crucial steps that every tenant could take to ensure a successful outcome.

These steps include writing a strong LOI, budgeting for capital expenditures, clarifying deposit and rental details and hiring an attorney.

1. Write a Strong Letter of Interest/Intent

Chances are that in a competitive market you may be competing with other businesses for the same space.  If this is the case, a solidly written LOI can both represent your business as the ideal tenant for the space and guide the landlord in presenting a lease agreement that is favorable to your business.  A well-written LOI may include the following elements:

    • Your business’ name and what it does
    • Your specific services (and/or products) and pricing
    • Years in business
    • Your preferred terms of the lease

For lease terms, be sure to mention the key factors of assignability (important if you have plans to sublet your space) and the length of the lease (usually 3, 5, 7 or 10 years).  Consider whether you plan to make significant improvements.  If so, perhaps this can be mentioned with an early request for build out credits (temporary reductions in rent to offset your investment in any renovations).

2. Budget for Capital Expenditures

Once you receive your lease agreement, review it thoroughly to determine your actual financial obligations above ad beyond the face value of the rent.  How much you may be required to pay will be determined in large part by whether you are agreeing to a “full-service lease”, “modified gross lease” or “net lease”.

    • Full-Service Leases – In this type of lease, the landlord agrees to cover all property taxes, property insurance and utilities and provide maintenance and janitorial services.  Full-Service Leases, rents tend to be higher, yet more predictable.  Predictability allows businesses with this type of lease to budget more easily.  Full-Service Leases are the typical lease type for space in office buildings.
    • Modified Gross Leases – These are similar to full-service leases in that they charge a fixed rent.  However, in addition to rent, a single fee is charged to cover the costs of taxes, insurance and property maintenance.  This service fee is fixed for the life of the lease, which means that if any of the component expenses were to rise, the landlord cannot increase the lump-sum fee charged with the rent. Because the cost is predictable, tenants are able to budget accurately.  There is, however, the likelihood of annual increases in both rent and fees.
    • Net Leases – These are leases where some or most of the additional expenses are covered by the tenant. These expenses are paid in addition to the rent due and are itemized as exact costs based on the actual amounts needed to reimburse the landlord. The main difference between a modified gross lease and a net lease is that the landlord raises (or lowers) the non-rent portion to keep up with any increases (or reductions) in their monthly expenses.   The degree to which the commercial tenant reimburses the landlord for these non-rent expenses is determined by whether the governing agreement is a “single”, “double” or “triple” net lease.  In most single net leases, the tenant is responsible for reimbursing the landlord for a prorated portion of the property taxes. In the typical double net lease scenario, tenants cover both prorated property taxes and their portion of any property insurance.  In a triple net lease, tenants pay for a portion of the property taxes, insurance and the maintenance and upkeep of the property.  Triple net leases tend to have the lowest rents per square foot, however, the changing nature of the additional expenses makes it harder for tenants to budget. Not being able to accurately budget introduces an element of risk that does not exist in full-service leases.

Triple net leases are most common with retail tenants such as storefronts and restaurants.

3. Clarify Deposit and Rental Details

It is important to review how the lease agreement treats the deposit, rent increases and rent abatements. It is standard practice for deposits to be equal to 3-6 months of rent and fully refundable in the absence of delinquent payments and property damage.  Rent increases of 3% to 5% annually are reasonable in Florida’s commercial real estate market.  Rent abatements occur when a tenant is not required to pay rent (or is allowed to pay a reduced rent) due to damage not caused by the tenant.  For example, the landlord may need to reduce or freeze the rent obligation if flooding suddenly occurs due to leaks in the ceiling.  Ensuring that rent abatement is included in the agreement reduces your business’ exposure to risk by protecting its cash flow in the case of business disruption.

Also consider: If you proposed any other special rental terms in your LOI – have these been incorporated into the agreement?

“Rent abatements occur when a tenant is not required to pay rent due to damage not caused by the tenant.”

4. The Importance of Counsel

Commercial lease agreements are important, legally binding documents that govern one of your business’ most important assets: your place of work. Your success as a provider of goods and services, as an employer and as a financially viable business will hinge on the terms and conditions laid out in your commercial lease agreement.

Be sure not to “go it alone”.  Hire an experienced real estate attorney with an understanding of the local commercial market and have them review all documentation from your Letter of interest to the final lease agreement.

Remember, your real estate agent may not have a duty to represent your best interests over those of the landlord.  However, your attorney will always represent you and only you.  Your real estate agent cannot legally or ethically give legal advice or legal opinions. Only your attorney can advise you on any legal matters that affect your business.

Is your business the future tenant in a real estate lease agreement?  Hire legal representation and ensure that your business’ legal needs are met. Contact South Florida Law, PLLC today for a free consultation on (954) 900-8885.  Or click here to reach out to us via our contact form.

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