Whether you are opening your first office, leasing a retail space, or expanding your business, commercial property contracts form the terms of your tenancy or landlord-tenant relationship. They are integral in determining your rights and obligations. These contracts can be intimidating, but with the help of a qualified teacher, anyone can master learning commercial property contracts and avoid costly errors.
This easy-to-understand guide covers essential clauses and terms contained in commercial leases, empowering you to read the fine print with confidence.
The Value of Understanding Commercial Contracts
Commercial lease agreements are vastly different from residential leases. They’re usually longer, more complicated, and less regulated, which means there’s more risk if they’re misunderstood. Understanding the vernacular of these contracts allows you to:
- Safeguard your business investment
- Don’t get surprised by my new financial duties
- Stay flexible as your business expands
- Lay the legal groundwork for long-term operations
The Terminology You Need to Understand in Commercial Property Contracts
Lease Term
This is the time you are legally required to be on the property. Terms can range from months to years.
There are some leases with options for renewal or security of tenure, depending on how similar they are, that can provide stability and continue the duration of your stay after the initial term. Always ensure the lease length makes business sense.
Demise
This clause describes the precise area we’re renting, often specifying floor plans or square footage. This is particularly important in multi-tenant buildings, where public and private spaces need to be easily distinguished.
Use of Premises
It also spells out what you can use the space for — from retail to warehousing to food service to office work. The type of this clause should correspond with your business model, or local zoning or planning laws. Too-narrow definitions can constrain your business — or your prospects for growth. If you are uncertain, you would be well served to obtain clarification on this before signing.
Exclusive Possession
This provides you with the right to occupy and operate within the leased premises, free from disruption. Landlords may enter only in certain circumstances — they must typically give notice to inspect, make repairs, or for emergencies.
Knowing this clause is essential to prevent disruptions to your employees and the public, and to avoid spending hours on end in your company, you will need to be familiar with it.
Rent and Rent Review
Leases often stipulate the quality of rent and typically include rent review clauses. These set out the time and manner of rent adjustment during the term of the lease.
Typical methods of rent review are:
- Market rent adjustment
- Indexing increases for inflation (e.g., using the CPI)
- Fixed increments at predetermined periods
Knowing that rent can change means that you can plan your budget accordingly to avoid financial strain in the future.
Break Clause
A break clause is a term in a lease that permits either the landlord or the tenant to terminate the lease before the end of the lease term. This clause is crucial for flexibility, especially if your business situation changes
Key considerations include:
- Notice period
- Rent up to date
- No existing breaches
Covenants for Repair and Maintenance
This is who is liable for maintaining the property in good condition. However, duties can vary, so you will want to specify the terms to prevent unexpected costs.
Generally:
- Tenants handle internal maintenance
- Structural maintenance falls to the landlords
Assignment and Subletting (Alienation)
This clause determines whether you can transfer your lease at all, and if so, under what conditions. In case you need to move, reconfigure, or share space with another tenant, flexibility is key.
Landlords commonly withhold consent until you’ve asked for permission to assign or sublet, so read this provision carefully.
- Insurance
Insurance clauses specify the types of coverage required and who is responsible for paying for them. Ensure you understand your responsibilities and verify that your insurance is sufficient for your activities. Typically:
- Landlords ensure the building
- Cover with Tenants Contents and liability insured by you as a tenant
Other Crucial Clauses
- Forfeiture: Sets forth the circumstances under which the landlord can terminate the lease due to a breach of contract.
- Security of Tenure: It means that the right to renew the lease cannot be taken away from you unless both parties have agreed to terminate it.
- Confidentiality & Indemnity: Protect private information and assume responsibility for risks or damages.
- Force Majeure: Covers unforeseeable circumstances such as natural disasters or government restrictions that may affect your ability to fulfil an obligation.
Practical Tips for Beginners
- Read the whole document — including the fine print — before signing on the dotted line.
- Bargain where you can — many clauses are not set in stone.
- Ask for clarification — if you don’t understand something, consult a lawyer.
- Paper trail – have something in writing regarding all agreements and addendums.
When you take the time to read commercial property contracts, you mitigate your risks and have control over your leasing decisions.
Frequently Asked Questions (FAQ)
Q1: Are commercial leases open to negotiation?
A: Yes. Rent, lease length, and break clauses are all highly negotiable. Both parties have an interest in constructing a workable agreement.
Q2: What is the distinction between assignment and subletting?
A: Assignment is when you transfer your lease to someone else. With a sublet, another person takes over some or all of the property while you continue to be bound under your original lease.
Q3: Can a landlord raise rent (as much as they want, whenever they want)?
A: Not usually. Increases must be by the terms of the rent review clause, which should specify when and how an increase can be made.
Q4: Can you break a lease early?
A: Not unless there’s a break clause or mutual agreement. If you ever leave early without those terms, you may be fined or in trouble.
Q5: I need a solicitor to review my lease, right?
A: It’s strongly recommended. Don’t take the risk of signing for anything permanent that fails to protect your business’s best interests. With a solicitor, you won’t have to. Commercial property contracts are contracts that make it easier to deal with disputes if they occur.
Take Charge of Your Commercial Lease
When you are familiar with the language and structure of commercial property agreements, you will be better prepared to negotiate, sign your next contract, or plan for the business’s future. Whether you’re new to leasing or looking to expand your portfolio, it’s not too late to learn about commercial property contracts and gain the confidence to make the right decisions.