Key Terms in Commercial Leases.
Entering into a commercial lease for your business, whether you are launching a new business, or you are relocating your current business, can seem like a daunting task. It does not need to be. Most commercial leases have standard terms that an experienced attorney can easily guide you through. When presented with a proposed draft lease, here are some important elements to consider. This blog will not replace a careful review by an attorney, but your understanding of these elements will help demystify the dense language in a typical commercial lease.
Triple Net Lease or other?
Commercial landlords very often propose leases which are triple net – or a version of triple net. So, what does that mean? The lease itself might not use the phrase “triple net” or “gross lease” or any label at all. Instead, you will know that a lease is triple net, etc… because the Tenant (that’s you) will be responsible for almost all of the costs of carrying the property. Be prepared to pay base rent, additional rent, property taxes and other costs captured in the lease terms. Some leases set the amount of additional rent as a fixed number and others set a preliminary amount to cover anticipated expenses and then provide that there will be an adjusted or catch-up payment by tenant to take into account the actual expenses paid by landlord over the prior year. Make sure that the lease gives you the right to receive copies of all underlying documentation substantiating the landlord’s calculations. In a similar way, real estate taxes could be spread out over the entire year, or the lease may require that the tenant pay the real estate tax bill upon presentation. Here is a useful summary of considerations such as common area maintenance and improvements.
In Illinois, you cannot rely on custom and practice to fill in the missing terms of a lease. The financial terms in a lease should be highly factually specific and you should consider asking for a 12- or 24-month history of payments for those categories of costs that the lease will impose on you. Make sure that you understand exactly what the obligations will be and rely on your counsel to push back during negotiations. Most leases are long-term obligations which, when reduced to writing, will be enforced as written.
Now that we have rent and carrying costs out of the way, what other important lease terms should you be aware of?
After rent, contribution to CAM and tax payments, there are other critical lease terms to understand: upkeep, maintenance, repair and replacement obligations. These words have specific, and sometimes costly, meanings, so you should carefully review these promises. When a tenant must repair and maintain the HVAC system, that generally means annual service of the system and components and paying for filters, a faulty fuse, etc… The obligation to replace an item means paying for a whole new A/C unit, water heater, etc… Remember that disagreements about who is responsible for paying to get the water heater working can lead to downtime if your business cannot operate without hot water.
What is the term of your lease and what are your options for extending the lease term? You should carefully consider the renewal/extension terms built into a lease. While the parties could always mutually agree to extend a lease, even without express language in the lease, the rent and other material terms would be open to renegotiation at that time. Maybe market conditions will support a more favorable deal at that time, or maybe the landlord will be in a position to demand a much higher rent? An extension/renewal clause with a fixed base rent increase is the way to control that variable in the future. If you have the option to extend the lease term, remember that you are likely required to give a particular type of notice of your intent to exercise your option. Calendar those important deadlines and make sure that you deliver notice exactly as required under the lease and to the parties at the addresses specified in the lease. Early consultation with an attorney can assist you if you are not certain of your obligations under the notice provision.
While tenants in commercial leases do not have the types of special protections afforded to residential leases, commercial tenants still have certain remedies.
A commercial lease is a contract between two parties who will be presumed sophisticated under the law. This means that the terms of your lease will be enforced strictly as written. On the bright side, every lease in Illinois includes a covenant of quiet enjoyment, meaning that the landlord cannot make it impossible for the tenant to use the space for its intended purpose. While the application of this concept is subject to interpretation, it can be a powerful right because your obligation to pay rent might be forgiven during a period where your quiet enjoyment was interrupted. Review your lease carefully for a clause that describes what happens in the event of an act of God (also called force majeure). This often-overlooked clause took on a whole new meaning post- 2020. For an informative summary, see: https://www.americanbar.org/groups/litigation/committees/commercial-business/boilerplate-contracts/force-majeure-clauses-contracts-covid-19/
The lease should describe whether you have any right to withhold (or delay) rent in the event that, for example, a governmental order closes businesses or otherwise makes it impossible for you to operate your business. The same clause will also describe whether the landlord is relieved of its responsibilities during a period of force majeure. You will also want to understand whether you have the right to terminate the lease and, if so, when. Remember that even if you have the right to terminate the lease under certain circumstances, you should always comply with the notice provisions and you should consult an attorney to guide you through what is bound to be a difficult exit negotiation.
If you have any questions, or would like to schedule an initial consultation, please contact Navigant Law Group, LLC at (847) 253-8800 or email us at email@example.com.
At Navigant Law Group we know the ropes of the legal system. Business services include: Contract Law, Employment Law, Intellectual Property, WBE / MBE / VBE / LGBT / DBE certification, Commercial Real Estate, Leasing, and other general Business Law services. Individual services include Estate Planning, Wills and Trusts, Estate and Trust Administration, Probate, and Guardianship.
This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.