A commercial lease agreement sets the rules of engagement between a landlord and a commercial tenant. Because Colorado law operates on the assumption that commercial parties are sophisticated enough to protect their own interests, a commercial tenant does not enjoy the same legal protections that a residential tenant does. A commercial lease drafted without the assistance of a lease agreement lawyer could literally bankrupt your business.
How to Draft a Commercial Lease Agreement
You need a business lawyer to draft a commercial lease because every word in the contract has potential legal ramifications. Even a single misplaced comma could have devastating consequences when landlord and tenant mean two different things by an ambiguously expressed lease term.
At the very least, a commercial lease should identify the parties to the lease, state who is the landlord and who is the tenant, give the address of the property, and include the amount of the rent. It should also include a start date and an allocation of any other costs. Both parties should sign the lease.
If the lease is incomplete and ends up in court, a judge might insert missing terms into the lease. Another alternative would be to declare the entire lease void from its inception and assess “fair market value” rent against the tenant for the time that the tenant actually used the premises.
What Terms Should a Commercial Lease Include?
A sound commercial lease should include at least the terms described below.
The Identities of the Parties
The lease should clearly identify the parties to the lease. In commercial leases, it is common for both parties to be commercial enterprises (corporations or LLCs, for example) rather than individuals.
The Identity of a Guarantor
Most commercial landlords require a guarantor, at least if the tenant is not a well-established business or startup, Depending on the circumstances, the guarantor mnght be the owner of the business in their personal capacity, or it might be a third-party guarantor. In any case, they are the party who must pay out the lease obligations if the tenant defaults.
A Description of the Property
You might simply identify the property by its address, or you might use the description contained in the title document. Clarity is especially important when the tenant rents only part of a formerly unified parcel of real estate.
Limitations on the Use of the Property
The landlord will probably want to include certain restrictions on the use of the property. They will almost certainly prohibit:
- Residential use;
- Illegal activity such as drug use, prostitution, or gambling;
- Uses that violate applicable local zoning ordinances.
A commercial lease might include other restrictions as well.
The Term of the Tenancy
This clause should clearly indicate the lease term (the starting and ending dates of the tenancy), the conditions of early termination, and whether renewal is automatic.
The lease should state:
- The total amount of the rent and the amount of each installment;
- When the tenant should pay the installment; and
- How the tenant should pay (bank transfer, etc.)
The lease may also include financial penalties and eviction remedies for late payment.
The lease should state the amount of the security deposit, when and how the tenant should pay it, and the terms of its return to the tenant.
Most commercial leases place limits on business renovation and require the tenant to restore the premises to their original condition at the end of the lease.
The lease should specify which party is responsible for maintenance and who is responsible for repair and utility bills.
Additional Terms and Boilerplate
You should include other terms as your priorities and individual circumstances demand, and the landlord will do the same. For example, some commercial leases require a personal guarantee that makes an individual or another entity responsible for the obligations under the lease if the tenant defaults. This is usually done when the tenant is a new entity with a limited financial history but may also be required by the landlord in all cases as a general requirement.
Additionally, don’t neglect “boilerplate” clauses such as governing law, dispute resolution, etc.
When the parties are business entities, it is important that the appropriate individual sign the lease. The signing page should also identify the position that the signer occupies within the company (CEO, for example).
Types of Commercial Leases
Following are the main types of commercial leases that are currently in use:
- A flat monthly rent;
- A flat annual rent;
- A fully-serviced lease where the rent includes utilities, etc.;
- A net lease, where the tenant pays rent plus all or some of the taxes, insurance, and maintenance that the landlord would otherwise pay;
- A double net lease, where the tenant pays rent plus all taxes and insurance expenses;
- A triple net lease, where the tenant pays rent plus all taxes, insurance, and maintenance; and
- A percentage lease, where the tenant’s rent is based on a percentage of sales or profits.
This is not an exhaustive list of commercial lease types. The different types are limited only by the creativity of the parties.
What If the Landlord Wants to Amend the Lease?
Normally, the landlord cannot unilaterally amend the lease. Instead, they are limited to the following means:
- Secure the tenant’s agreement to the amendment;
- Wait until the renewal of the lease and renegotiate the terms of the lease with the tenant (depending on the terms of renewal); or
- Terminate the lease early (if the terms of the lease allow this) and negotiate a new lease with a new tenant.
A leasing term that purports to give the landlord an unconditional and unlimited right to amend the lease would probably not even be considered a binding legal contract.
What If the Tenant Wants to Amend or Terminate the Lease?
A tenant may also wish to terminate a lease early. There are many possible reasons for this. The business may have become insolvent, the tenant might have found a better deal elsewhere, or the market may be changing in ways that require the tenant to relocate or demand amended lease terms that the landlord would never accept.
If a tenant unilaterally breaks a lease in violation of the lease terms, the landlord generally has the right to sue the tenant for all of the rent, etc, that the tenant would have paid until the end of the lease term. The landlord, however, has an obligation to attempt to rent the empty space to another tenant and, if successful, subtract the amount the new tenant pays from the amount owed by the former tenant.
You should understand every nuance of a commercial lease before you sign it. Additionally, you should not hesitate to attempt to negotiate unfair or unfavorable terms in the landlord’s draft of a lease. Retain a business lawyer and have your lawyer examine and explain every aspect of a lease before you sign one.