During the lifetime of a business, it may become necessary to seek a commercial space to conduct business activities. While this is an exciting step, securing a property can be a time-consuming and arduous task. Commercial lease agreements are highly complicated legal documents that can either work to your benefit, or hurt your business long-term. Given the financial and legal importance of signing a commercial lease agreement, many business owners seek assistance from our team of experienced commercial lease and business attorneys. To learn more about how we can help, consider contacting Baxter Legal Services at (425) 686-0574 today.

Essential Elements of Commercial Lease Agreements

 Due to the fact that a commercial lease agreement is a legally binding contract, it must include certain elements and pertinent information. Without these key elements, the agreement would not be considered enforceable. The majority of these factors are discussed well before a lease is drafted, as both parties must agree on the terms before signing the document. Some of the essential elements of commercial lease agreements include the following:

  • Information about all parties involved in the agreement. Commercial lease agreements should begin by first naming the landlord and tenant using full legal names and relevant designations, such as LLC or LLP, for instance. Even if you are still in the process of forming your business, this information must be reflected within the agreement for it to be legally enforceable.
  • Rent payment clause. This clause must include more than simple information regarding the amount the tenant must pay each month. It is important to designate when and how rent must be paid as well as how totals are calculated. Additional costs that the tenant may be subject to should also be clarified in the lease, such as building insurance, property taxes, and maintenance costs, as well as allowable rent increases.
  • Term clause. Traditionally, the term clause is included in the beginning of the commercial lease agreement, describing the length of the lease and identifying the starting and (if applicable) ending dates of the agreement. Commercial lease agreements can be flexible, allowing for short-term or long-tern tenancy, but these terms must be specified within the lease. Moreover, it is essential to include how and when the lease can be renewed and when the tenant assumes responsibility of the property. More often than not, commercial lease agreements have multiple start dates that designate when the tenant is able to enter the property, begin paying rent, when the business can open to the public, and when the tenant must secure insurance, for instance.
  • Information regarding use. This clause provides clear limitations about how the space can be utilized, the type of business that can be conducted within the property, and the products or services that may be offered in the space. These clauses are typically brief and should avoid excessive limitations on the tenant.
  • Renovations and improvements. In some cases, a commercial space must be remodeled or redesigned to suit the needs of the tenant. It is essential to identify how this work will be completed, who is responsible for paying for any renovations, and whether the tenant will be responsible for returning the space to its original state before the lease ends. Addressing these issues in a commercial lease agreement is key to understanding the landlord and tenant obligations before issues arise.

Commercial lease agreements are complex contracts that can be tailored to suit the unique needs of each party. As such, it is important to carefully negotiate these agreements and reflect all terms in writing within the document. These agreements should be exhaustive, accounting for all possible issues and concerns that may arise during the lease period.

What to Know Before Signing a Commercial Lease Agreement

 Given the complexity and financial obligations associated with commercial lease agreements, it is crucial to fully understand all terms before signing the contract. It is advisable that commercial tenants enter into lease agreements with the understanding that they will be bound to pay all, or most of, the entire agreed-upon price.

 Since a lease is a legally binding contract, it is important to ensure that you are well-positioned to uphold your end of the agreement. In many states including Washington, landlords have a duty to mitigate but are generally unlikely to terminate an agreement simply because a business is struggling. Signing a five-year agreement for $2,500 per month, for example, translates to a $150,000 contract. When signing a commercial lease agreement, consider the following questions:

  • What is the full financial commitment of this lease? Before signing a commercial lease agreement, ensure that you have a full understanding of what the lease entails financially. Does your business have the projected annual revenue to assume the risk of the agreement?
  • What are the zoning laws, nuisance laws, and demographics of the area? Perhaps the most fundamental issue to consider before signing a commercial lease agreement is location. If you are selling a product or service to the public, does your target clientele live in or frequent the area? Is your business able to legally operate in that municipality? Consider researching zoning laws in the relevant town or city to avoid legal issues down the line. Similarly, are there stipulations in the vicinity regarding noise or other similar issues? If so, this may be an important consideration before signing the agreement.
  • Are all negotiations included within the lease? Written business leases are legally binding. Verbal promises are much more difficult to enforce. If you have negotiated specific terms regarding the prospective commercial space, ensure that this is reflected within the agreement.
  • Who is responsible for repairs and maintenance of the property? Common area maintenance fees (CAMs) are an important consideration when signing a commercial lease agreement. These fees, paid by the tenant, are used for repairs and the maintenance of the property. If CAMs are included in your lease, ensure that you understand what is included and how these fees are calculated. Aside from CAMs, be sure to acknowledge who is responsible for addressing issues such as graffiti, security, and whether existing furniture and fixtures can be altered.
  • Is there ongoing litigation against the landlord? Before committing to a long-term lease agreement, consider whether there are any ongoing lawsuits, either against the landlord or between the landlord and any neighboring tenants.

Common Pitfalls of Commercial Lease Agreements

 Commercial lease agreements are typically lengthy, dense legal documents which contain provisions and clauses that are difficult for even the most experienced business owners to understand. Successfully navigating commercial lease agreements requires a high level of scrutiny and a deep understanding of the law. 

 After spending years working alongside business owners, we have identified the most common pitfalls associated with commercial lease agreements. These include the following:

  • Inadequate planning. The commercial space that you lease should not dictate the way you conduct business. Rather, the location and design of your space should be determined by how you will do business. Business owners may encounter trouble if they require a specialized space, such as reinforced flooring for heavy duty equipment or backup energy supplies, for instance, that cannot be accommodated by the property. Consider whether the space is conducive to your business’s potential growth and expansion. Many times, business owners outgrow the space quickly but are locked into a multi-year agreement.
  • Common Area Maintenance (CAM). These expenses are a major pitfall for business owners, as landlords may attempt to use CAM provisions for profit. CAM expenses typically require the tenant to pay the pro rata share of the operating expenses that are incurred by the landlord to maintain the property. The tenant should only be responsible for legitimate costs associated with the operation and maintenance of common areas of the property, like lobbies, stairwells, and parking lots. Capital improvements and legal compliance issues should not pass through the tenant, so be wary of these matters when negotiating a commercial lease agreement.
  • Notices of Eviction. Similar to residential leases, landlords have the ability to evict commercial tenants in certain situations. A commercial unlawful detainer, otherwise known as eviction, can be sought by the landlord for specific reasons, including the unlawful subletting of the space and failure to pay rent. In Washington state, commercial landlords may obtain a writ of restitution, which orders a tenant to return their leased property back to the landlord before a trial begins. Additionally, commercial landlords may be entitled to double rent at the time of judgement, which can significantly impact your business.

 If not careful, these pitfalls can have major legal and financial consequences for your business venture. One of the most effective ways to avoid these costly missteps is to seek legal guidance. Experienced business attorneys at Baxter Legal Services are privy to the typical errors that are made when drafting and signing commercial lease agreements. We are able to identify the clauses that may disadvantage the business owner and negotiate more favorable conditions.

What Is Triple Net Lease (NNN)?

 Broadly, there are three types of commercial lease agreements: gross leases, net leases, and modified gross/net leases. Given their flexibility, net leases are common in the commercial real estate sector. One form of net lease, the triple net lease, is a common arrangement that many landlords favor. The triple net lease (NNN) is an agreement in which the tenant pays for all the expenses associated with the property, including insurance, property taxes, and maintenance.

 Triple net leases typically have lower rent prices because of the responsibilities that the tenant assumes, which would otherwise be placed on the property owner. For landlords, these lease agreements provide steady revenue streams and are low risk, making them an attractive option.

 Triple net leases give business owners direct control of the cost of utilities and the insurance carrier they will utilize, which can be advantageous. Additionally, they allow for total control of the appearance of the property, which can be important to some business owners. On the other hand, triple net lease agreements are risky for tenants, as unexpected costs may arise in the form of repairs or taxes. Furthermore, landlords may overestimate costs when setting the rental price, leading the business owner to overpay.

The Differences Between Residential and Commercial Leases

 There are several key differences between residential and commercial lease agreements. Commercial leases are used for commercially zoned spaces and contain more specifications pertaining to how the property can be used. Residential leases, on the other hand, provide a living arrangement. These types of leases most typically apply to homes, condos, apartments, and townhouses.

 Understanding the differences between residential and commercial leases is important, as each type of agreement provides for unique legal protections under state law. Residential tenants often have more protections under the law, including the warranty of habitability and rent control. In residential agreements, the landlord is responsible for ensuring that the property is inhabitable and therefore must address all repairs and property maintenance. Moreover, residential properties may be rent-condoled, while this is not the case with commercial agreements.

 Commercial tenants are typically required to maintain their own space unless otherwise specified in the agreement. Business owners must take care when entering into commercial lease agreements, as these contracts are often drafted to favor the landlord and are much more difficult to exit compared to residential leases. As such, compared to residential lease agreements, commercial leases should be carefully negotiated before signing.

How Can Hiring a Business Attorney Help?

 Commercial lease agreements are legally intricate contracts that involve high financial risk and long-term obligations. Understanding the importance of these agreements, more and more business owners are seeking guidance from experienced business attorneys to ensure that their rights are upheld while negotiating commercial leases. An experienced business lawyer is able to leverage their knowledge of the law and experience with lease contracts to negotiate terms and conditions that most effectively protect your interests.

 Since commercial lease agreements are subject to fewer consumer protection laws, are legally binding for the long-term, and are highly customizable, it is important to craft a lease that benefits your goals as fully as possible. By evaluating all stipulations, proposing necessary provisions, and mitigating disputes, hiring a business attorney ensures that these goals are met as efficiently as possible.

Contact Baxter Legal Services Today

 Entering into a commercial lease agreement can be daunting. There are a range of legal and financial technicalities that come into play when drafting and signing commercial lease agreements, and simple missteps can have disastrous consequences. To avoid undue pitfalls and ensure that your commercial lease agreement is conducive to your business interests, consider contacting Baxter Legal Services today at (425) 686-0574.