Wading through a commercial lease document can be a daunting task, but skimming one given to you by a prospective landlord just isn't an option. In commercial real estate, the initial lease agreement should be viewed as a rough draft. The landlord will likely present you with a document that heavily favors them, but through negotiation, you can have language adjusted and clauses added to protect your interests. Here are some clauses that you'll want to ensure your lease contains before you sign:
1. Break Clause
A break clause gives you the ability to end your lease early under certain circumstances and is especially important if you are signing a long-term lease. Typically, the clause outlines certain conditions under which you can terminate, such as if the landlord fails to meet certain obligations or your business struggles financially. When negotiating, make certain the fees assessed for exercising the clause are in line with market trends.
2. Right to Sublet and Assign
The right to sublet and assign gives you more flexibility in a long-term lease. With subletting, a second tenant rents all or part of your space while you maintain the lease. Assignment allows you to transfer the lease to a new tenant before you walk away. Beware of sublet and assignment clauses that require you to jump through hoops to exercise your right or that place too many restrictions on when you can exercise it.
3. Exclusive Use Clause
An exclusive use clause prohibits the landlord from leasing space in your building to other companies in your industry. If you intend to rent a large portion of the building, you can likely negotiate to have this clause added to your lease. Smaller companies should scrutinize the use clause for restrictions that could hinder your ability to expand your lines of business in the future.
4. Improvements and Alterations Clause
In this clause, the landlord agrees to a tenant improvement allowance and spells out how the funds will be used to prepare or renovate the space prior to your move-in day. The clause also tells you what alterations your company can make to the space during the lease and whether you need written permission from the landlord to begin. Make sure you have created an improvements wish list prior to negotiations, so that you can accurately assess the adequacy of the proposed allowance.
5. Renewal Clause
The right to renew helps to protect your company from having to move out of a space that is working for your business needs at the end of your lease. It's important that the lease clearly outlines what steps need to be taken to notify the landlord of your intention to renew and that the stipulated deadline for notification is reasonable.
6. Right to Cure Clause
The right to cure protects your company in the event of a default. It outlines how your landlord must notify you that you are in default and specifies how much time you have to rectify the situation before eviction proceedings begin. Carefully read the clause to ensure that the amount of time granted is adequate.
7. Dispute Procedures
If you have a conflict with your landlord, the dispute procedures determine how the issue will be resolved. Be wary of language that requires you to forego your rights and use arbitration rather than traditional legal proceedings.
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