For new businesses, the lease for commercial space is often essential to the success of the enterprise. Commercial leases are different than residential leases in that they involve much more negotiation and much less standardization. The commercial landlord will often present a form lease to a tenant, but a difficult negotiation often follows. Small businesses must energetically advocate for their interests, because a bad lease term could potentially ruin their business. They should know what terms they want and have a good idea of what would be fair, before they start negotiations.
It is recommended that a small business get a lawyer’s help to make sure their interests are being protected in their commercial lease. Landlords must be careful to bring in businesses which will be financially responsible and which will get along well with other tenants. Landlord should prioritize their terms and know how flexible they are on each one, so that they are able to better accommodate the demands of potential tenants. Accommodating landlords end up with better terms if they know how to balance their bargaining power for the best possible deal. Sometimes, acquiescing a small amount in one area allows them to benefit greatly in another area.
Drafting & Negotiation
Generally, the most important term of a commercial lease is the type of lease. Here are four basic types of commercial leases based on how the tenant is charged rent:
- Percentage Leases — tenant pays base rent plus percent of monthly sales
- Net Leases — tenant pays base rent plus some or all taxes, insurance or maintenance
- Gross Leases — tenant pays one lump sum to landlord, who handles all expenses
- Rentable Square Feet Lease — tenant pays a rate for each “rentable square foot” a term combining all usable square feet plus a portion of the common area.
Both landlords and tenants must be very careful which terms they include in the lease. Here are the most common types of provisions found in commercial leases:
- Identification of Parties Clause
- Premises Clause — identification of the space the tenant will be occupying, including access to common areas
- Use Clause — Identifies any limitations on the tenant on the type of use for the rented space
- Exclusive Clause — limitations on the landlord from allowing any other particular type of business in the building
- Term Clause — describes the length of the lease, starting and ending dates, and dates when the tenant can set up, when rent is due, when insurance is required, and when the tenant can open for business, and any other important dates
- Rent Clause — describes the rent along with any scheduled increases and whether or not additional building costs (taxes, utilities, insurance, maintenance) are included
- Security Deposits Clause — describes the security deposit, which can be any amount (as opposed to residential security deposits, which are limited by law)
- Improvements or Alterations Clause — describes, in detail, the improvements that the tenant requires, who pays for it, who designs it, who does the work, and when it gets done
- Option to Renew or Sublet Clause — explains the rights reserved by the tenant and landlord regarding renewing, subletting or assigning the lease.
- Flexibility Clauses — describing contingencies like attorney’s fees in the event the lease is broken or there is a dispute, foreclosure or condemnation.
- Other Clauses — the lease may contain clauses describing the tenants responsibility for maintenance, utilities and compliance with city code, clauses describing parking limitations, tenant’s permission to post signs, landlord’s right to enter the premises, and cost of maintaining security on the premises
When negotiating these terms, both parties must be thinking about each term with an open-mind, considering all possible ramifications of each detail. Most conflicts between landlords and tenants in commercial leases arise from details which were not fully considered during negotiations.
Tips for Commercial Tenants
Commercial leases have less consumer protection laws than residential leases. So the bargaining process is much more important and the lease forms are much less standardized. Negotiating the terms of the lease is standard, and the tenant can almost always improve on the terms the landlord has presented. Tenants should be careful to protect their business’ interests in the bargaining process. Your business’ success may depend on several key contract terms. It is important to identify those terms before going into negotiations. You may need to throw the weight of your bargaining power behind one or two of your most-desired terms, for the greater health of your business.
For example, a landlord favors a long lease, but if a long lease will tie you down to a location that is not beneficial to your business, bargain to keep it short, and compromise on other terms. If the landlord renting adjacent space to a competitor would ruin your business, bargain for a clause preventing that situation. If you need to make improvements to the space, but lack the money to do it immediately, bargain to have the landlord make the improvements, possibly in exchange for a higher rent. Terms for subleasing and assigning should also be negotiated, as well as terms of renewal. Any one of these terms could turn out to be crucial to the success of your business.
Finally, it is important to remember that, unless otherwise stipulated in the lease, commercial tenants are responsible for repairs and maintenance. Krueger v. Farrant, 13 N.W. 158, 159 (Minn. 1882); Dyrdal v. Golden Nuggets, Inc., 672 N.W.2d 578, 587 (Minn. Ct. App. 2003).
Tips for Commercial Landlords
Make sure you identify and prioritize the terms on which you are willing to compromise. Make sure you are adequately protecting the interests of your other tenants and honor any exclusivity clauses or other promises you have made to them. If you need to restrict the use a tenant makes of the space, include a use clause, which restricts the type of business conducted in the space.
Be specific about terms. Clarity about roles and responsibilities will help to avoid costly disputes. Also, put all like provisions in the same locations. Do not scatter maintenance provisions in several different paragraphs within the lease. This leads to disputes about whether the terms are ambiguous. Keeping the terms discrete will help avoid arguments about which provision controls.
Commercial Lease Eviction
Eviction of a commercial tenant is much like eviction of a residential tenant, except the commercial tenant receives much less legal protections than residential tenants. Commercial eviction is usually most harmful to the tenant than the landlord in commercial leases. The law does require a minimum notice to pay rent that is past due. This is three days, unless otherwise stipulated in the lease. If the landlord desires an eviction because the tenant is not treating the property or usage of the premises with due care and respect, the landlord must give fifteen days notice to rectify the situation. The landlord should be prepared to prove that he served the tenant with notice.
After the notice period, the landlord is free to commence an eviction proceeding. If the landlord wins a judgment, the tenant will be liable for rent past due, plus the remaining rent through to the end of the lease, which could be a very large amount. This is usually lessened because the law imposes a duty on the landlord to mitigate his losses, and make a good faith effort to find another tenant. However, in a bad rental market, when it take several months to fill a vacancy, the tenant may end up liable for several months of rent, even though he is out of possession of the space. This can be a disastrous liability for small businesses, and many evictions cause small business owners to lose their business.
Tips for Landlords
Landlords should always take care to follow the proper procedure for evictions. Self-help evictions are not allowed in Minnesota. Filing a complaint in court is the mandatory legal procedure for evictions in Minnesota. When you serve notice, be prepared to prove that it was served.
Tips for Tenants
If a conflict is brewing between you and your landlord, consult an attorney immediately. Usually, there are many solutions to the conflict before it goes to court, and very few solutions afterwards. It is always better to address conflicts with landlords immediately.
How Much Does It Cost?
Each situation has its own complexities and there are many aspects to discuss to understand the details of your situation and advise you accurately. We have an experienced attorney here who would be happy to analyze your situation’s circumstances and advise you of your legal rights and options. This can generally be accomplished during a one-hour meeting (which can be by phone) at our standard hourly rates. We do not offer free consultations on this type of work.