7 Commercial Lease Clauses You Need to Know

Each of these should be carefully scrutinized, advises Gary Tasman of Cushman & Wakefield.

Gary Tasman

Although it seems the worst of the COVID-19 pandemic may finally be behind us, its effects continue to change the way we do business. It also continues to create some challenging situations for both commercial property owners and their tenants.

Earlier this year, we discussed how force majeure lease clauses are being interpreted in the context of the pandemic. Force majeure is just one of many clauses that are essential for property owners to protect their investments. There are a number of other clauses that are—or at least should be—included in any commercial property lease, and many of them are even more relevant in our “new normal.”

Governing Law

Laws can vary quite significantly from state to state, and that includes the laws that interpret leases. Novice commercial property owners may not be aware that a contract can designate which state or jurisdiction’s laws will apply to it. In other words, just because a contract was signed in Florida, it may not be governed by the laws of the State of Florida.

As investors from across the country snap up property in our region, they may choose their home state’s statutes, or even U.S. Federal law, to govern potential contract disputes. Property owners need to understand their governing law options and how they vary to ensure they are making the most beneficial choice for their leases.

Improvements and Alterations

With demand for commercial property at an all-time high in 2021, it’s becoming more difficult for tenants to find a space that meets all of their needs. Many properties will need alterations to make them suitable for the tenants who wish to lease them. A clearly outlined improvements and alterations clause will denote what changes you are willing to make to the space before your tenants move in, who is responsible for the cost of those improvements or alterations, and the terms of payment if applicable.

This clause should also outline a tenant’s rights to make changes to their space in the future, and the process for gaining approval to do so. Many businesses have seen changes in their need for space and how they use it because of the pandemic, and tenants will likely appreciate the opportunity to alter their space to fit their needs. However, as an owner in our current market, you have a distinct negotiation advantage. While your prospective tenants may want a number of alterations made to a space, they also understand that you likely have other potential renters who may not have as many needs.

Subleasing

Subleasing is another clause that is particularly vital in our current environment. As some workplaces downsize their teams or shift staff members to remote employment, they may find that they have more square feet than they need. To remain financially viable while keeping their current location, some tenants may want to sublease a portion of their space to another tenant. The sublease clause outlines not only whether or not this is allowed, but can outline any specific restrictions and create a process for seeking approval to sublet.

Rent Escalation

Consumer prices have increased more than 6 percent in the last year, the biggest jump in inflation in three decades. As a lessor, that means it now costs you more to maintain your property. If you don’t have a rent escalation clause in your lease, you are solely responsible for covering those unexpected expenses.

Rent escalation clauses outline exactly how and when rent will increase for your tenants. This could be an annual increase of a fixed amount, for example a 2 percent escalation each year of the lease. However, this clause can also tie rent increases to inflationary indices like the consumer price index. This provides you with an insurance policy of sorts in volatile economic conditions.

Merger

With competition high for commercial space, many prospective renters are willing to negotiate to acquire the space they want. They may promise or agree to terms that would not typically be included in a boilerplate lease. No matter how formal these arrangements are, the merger clause will override any agreements that are not included in the actual lease document.

This clause protects everyone by ensuring that all enforceable agreements between parties are included in one singular document. For novice property owners, it is particularly important to remember to include every agreement with a tenant inside the body of the lease.

Tenant Self-Help

As a landlord, you hold certain obligations for the maintenance and repair of your property, and your tenants expect you to perform these duties. When property owners don’t take corrective actions, the tenant self-help clause outlines when renters can take matters into their own hands.

Property owners would clearly prefer to have control over the costs of these repairs, but in an emergency, it may be more efficient for tenants to take action. In these cases, the tenant self-help clause will outline which expenses are reimbursable, when repayment should occur, and the situations in which self-help is allowed.

Dispute Resolution

In the event that you and your tenants have a disagreement about any of the terms of the lease, the dispute resolution clause outlines how to resolve those issues. Often, leases will outline a multi-step approach, beginning with mediation, then progressing to arbitration before resorting to litigation. This type of approach can potentially reduce the cost and time involved with a lawsuit. A related clause, Attorney’s Fees, assigns responsibility for litigation costs. Typically, this clause will state that the winning party may recover attorney’s fees from the losing party. It can also denote responsibility for other costs like court fees, and even the expenses associated with arbitration or mediation.

In many cases, the clauses above are considered “boilerplate” by both inexperienced property owners and renters. However, each of these clauses should be carefully considered and scrutinized when writing and reviewing commercial lease agreements.


Gary Tasman is the founder of Cushman & Wakefield Commercial Property Southwest Florida and serves as its CEO & principal broker. With more than three decades of real estate experience, Tasman is consistently recognized as a top-producing broker. His firm provides commercial real estate solutions, locally and globally, in every stage of the real estate process, representing clients in buying, selling, leasing, financing and valuing assets. For more information, contact your Southwest Florida leading commercial brokerage team, at [email protected] or (239) 489-3600.

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