Definitions to Assist with Commercial Leases.
WHAT’S INCLUDED IN A COMMERCIAL LEASE DOCUMENT?
As you enter into a new commercial lease, there are certain terms you may need to understand. Here are the common sections of commercial leases, and a brief explanation of these sections. There is no standard for lease documents, each one may be different, with varying order of the items explained below.
PARTY & PROPERTY (RECITALS)
The official names of the tenant and landlord.
Lessor or Landlord
The lessor is the person who is granting the lease and who has the legal obligations related to the lease contract; the landlord. Sometimes this is an owner, but it may also be a property management company or commercial leasing company.
Lessee or Tenant
The lessee is the person leasing the space; the tenant.
Describes the space you are renting. Verify that you understand how the space is assigned and what specifically you are paying rent on.
Describes the options you may have to rent additional space in the building if it becomes available, or options to buy the property.
This is an allowance provided by the Landlord to be used by the Tenant to construct the space to meet Tenant’s space requirements.
An office or building that is ready to occupy. In most cases, this is a commitment by the Landlord to bear the cost of any build-out.
Decrease in rent due to interrupted or inhibited actions of the Landlord.
ALLOCATIONS & RISK
Indemnify of Lessor
The Lessor is protected against the Lessee from any claims, actions, damages, liability, and expense in connection with loss of life, personal injury, and/or damage to property arising at the Leased Premises.
Explains when the lease begins and ends. It may have an initial term and renewal term if applicable. This section may also describe how the lease may be re-negotiated.
Explains how the rent is calculated, including common area maintenance (CAM) and other costs associated with the lease. It may also contain any escalations in rent.
Gross Square Foot
The total square footage of the building or office being leased.
It is the tenant’s rentable area less certain common areas shared by all tenants of the office building (such as corridors, storage facilities, and bathrooms).
The actual square foot area for which the tenant will pay rent, it is the gross area of a building, less uninterrupted vertical space (such as stairways and elevators). Unlike useable area, the rentable area includes common areas such as lobbies, restrooms, and hallways, as well as the measurement of structural columns and architectural projections.
The Landlord agrees to pay an expense amount based on a base year (typically the first year) and the Tenant pays the increase in expense for subsequent years.
Load Factor is a method of calculating total monthly rent costs to a tenant that combines usable square feet and a percentage of square feet of common areas. Usable square feet + percentage of common area square feet = rentable square feet.
If utility costs are included in the lease, it explains how they are distributed among the tenants. In some cases, each tenant may pay separately for each utility. If the tenant is paying the utilities, this section may explain the requirement to pay them and what happens if they are not paid on a timely basis. This protects the landlord if the tenant fails to pay.
An abbreviation for ‘heating, ventilating, and air conditioning.’ May be listed under Utilities.
Describes the parking available for the leased space. Some lease documents differentiate between where employees may park and general customer parking.
Taxes and Insurance
Discusses who pays property taxes and insurance on the property. This section usually includes a requirement that the Tenant provide proof of insurance on property and equipment in the leased space and liability insurance, to protect the Landlord.
Describes the security deposit the Tenant is required to provide, and the circumstances under which it may be forfeited or returned.
Common Area Maintenance (CAM)
This term describes costs for areas in a building that are not directly leased but which are a common responsibility, such as hallways, restrooms, stairways, and walkways. Most Landlords add CAM costs to square footage costs to calculate lease payments.
USES AND RESTRICTIONS
Lists the restrictions on the use of the premises, including signs, hours of use, and limits on occupancy and sub-lessees.
Describes who is responsible for making and paying for maintenance and repairs. Most leases require Tenants to pay for repairs due to “wear and tear” (common usage), with the Landlord being responsible for extraordinary repairs due to major damage or failure of equipment.
Right of First Refusal
This is an agreement by Landlord to provide Tenant the first right to lease space that becomes available in their building.
RELATIONS WITH 3RD PARTIES
These clauses describe what happens if the leased space is destroyed or condemned.
Subordination, Non-Disturbance, and Attornment
Describes rights of the Tenant if the Landlord’s lender forecloses on the property. This section protects the Tenant against being ejected by a new Landlord or the bank.
Some leases have a separate section describing the conditions under which you can sub-let (divide) the space.
Explains what happens if there is a change in the Landlord’s situation, to verify that the Tenant is living up to his/her duties as a Tenant.
Defaults and Remedies
Describes what happens if one party defaults (breaks the agreement), and the remedies available to the other party.
Explains what happens if the Tenant does not leave at the end of the lease.
Agreement about who pays attorney fees in the event of a lawsuit between Landlord and Tenant.
Some leases provide for alternate forms of dispute resolution, like mediation and arbitration. Have an attorney review the terms of the lease, to explain any specific terms that you don’t understand, and to look for issues that might be a problem for you or are not what you thought you agreed to.
TYPES OF LEASES
Fully Serviced Lease
A lease in which the rental payment includes other services, such as utilities, maintenance, and lawn/snow removal services.
A lease in which the Landlord agrees to pay for all common expenses (CAM), including utilities, repairs, insurance, and (occasionally) property taxes. The cost of a gross lease is higher than for other types of leases because all of these items are included in the amount of the lease.
A lease in which the Tenant pays the square footage costs, CAM costs, and all other ownership expenses, including utilities, repairs, insurance, and property taxes.
Double Net Lease
A lease in which taxes and insurance expenses are included in the lease payment. The Landlord pays maintenance costs.
Triple Net Lease (NNN)
A lease which includes all taxes, insurance, and maintenance costs in the monthly payment.