Commercial real estate lease transactions are complex undertakings that require a comprehensive understanding of the legal and financial implications. Successfully negotiating a commercial lease involves understanding of the commercial real estate market conditions, the roles of brokers, lawyers and other professionals such as certified public accountants, and the terms of the lease. It is during the negotiating phase that the tenant and landlord determine the terms and conditions of the lease, including rent, lease duration, renewal options, and other important terms. The tenant’s ability to negotiate effectively can impact the financial viability of the tenant’s business. A key aspect of negotiation involves understanding commercial real estate market conditions. This knowledge can provide tenants with leverage in negotiating more favorable terms. Tenants must also consider their business needs and future growth plans when negotiating lease terms.
The Role of Brokers and Lawyers
Brokers and lawyers play crucial roles in commercial real estate lease transactions. Commercial real estate brokers serve as intermediaries between the tenant and the landlord and are responsible for identifying suitable properties, negotiating lease terms, and facilitating the deal. Their expertise in the real estate market and negotiation skills can be invaluable for tenants seeking to secure the best possible lease terms.
Commercial real estate lawyers, on the other hand, are responsible for ensuring the legality of commercial real estate leases. Commercial real estate lawyers review and draft lease agreements, advise clients on legal issues and risks, represent clients in disputes, and conduct due diligence. A lawyer’s role is especially important in protecting the tenant’s legal rights and mitigating potential legal risks.
Understanding Lease Terms
Triple Net versus Gross Lease
Understanding the difference between a triple net and gross lease can have a significant impact on the tenant’s lease expenses. A triple net lease, often referred to as NNN, requires the tenant to bear the cost of real property taxes, insurance, and maintenance of common areas in addition to monthly base rent. A gross lease, however, is a full-service lease and usually includes real property taxes, insurance and common area maintenance costs as part of the monthly rent. A modified gross lease can include real property taxes, insurance and common area maintenance costs during a base year as part of the monthly rent, however any increases to these expenses over the base year may be the responsibility of the tenant.
Tenant Improvements
Most tenants will need to make improvements to the leased space for the space to be suitable for their business needs. The tenant improvement terms will dictate the extent of improvements that can be completed, the required approval of the landlord and if landlord is completing any work to the space prior to delivering the space to the tenant. As an incentive to the tenant, the landlord can offer a tenant improvement allowance, which provides for the landlord reimbursing tenant for its construction costs at a certain amount per square foot of the space.
Assignment and Subletting
The assignment and subletting provisions require careful review. These provisions provide whether the tenant is allowed to transfer the lease to a new tenant or sublease any part of the space. It is common for landlords to restrict assignment and subletting, require the landlord’s prior written approval and that the tenant cover the landlord’s legal expenses in review of an assignment or subletting request.
Risks Involved in Commercial Real Estate Leases
Commercial real estate leases involve several risks for tenants. One of the primary risks is financial. Tenants must ensure that they can afford the lease payments and associated costs, such as maintenance and utilities, over the length of the term. Failure to meet financial obligations under the lease can lead to default, which have legal and financial implications. In the event of a default, the landlord may have the right to terminate the lease and remove the tenant from the space. The landlord may also be entitled to recover unpaid rent and other damages as a result of having to relet the space. The term of the lease, availability of extensions, physical location of the space, changing laws and regulations, and fluctuations in the economy are additional risks that tenants should consider before signing a lease.
Commercial real estate lease transactions are complex and require careful consideration of various factors. Effective negotiation with the help of experienced brokers and lawyers is crucial to obtaining the best possible terms in a commercial lease. Having an experienced Vancouver real estate attorney or Portland real estate attorney review your commercial lease is the best way to understand the risks associated with the lease and make informed decisions in securing a lease that aligns with your business needs.
