Property Law Leases: Commercial Applications Explored

Commercial leases are a type of property lease that is used for business purposes. They are legally binding contracts between a landlord and a business tenant, and they typically last between three and five years. Commercial leases are very different from residential leases. For instance, commercial leases are less regulated and offer fewer protections for tenants. They are also more flexible and allow for more negotiation between the landlord and the tenant. Additionally, commercial tenants are often responsible for paying property taxes and other fees, such as insurance and maintenance costs, on top of their rent.

Commercial lease agreements

• Commercial leases are usually longer-term, ranging from three to five years.
• Commercial tenants are generally responsible for paying at least a portion of the property taxes.
• Commercial leases are highly customizable and subject to negotiation.
• Commercial tenants have limited legal protections outside of what is explicitly stated in the lease agreement.
• Commercial leases may include different types of payment structures, such as net leases, gross leases, or modified leases.
• It is important to carefully review the terms of a commercial lease, including rent, security deposit, lease duration, and any additional costs.
• Commercial tenants should be aware of their rights and responsibilities, such as lockouts, security deposits, and subleasing.
• Commercial leases may include exclusive use or permitted use clauses, which define the allowed uses of the property.
• Commercial tenants should also consider the location, zoning laws, and any nuisance or environmental laws that may impact their business.
• Commercial lease agreements can be complex, and it is recommended to consult with a property leasing lawyer or a contracts attorney to protect your legal rights.

Commercial lease terms

Commercial leases are very different from residential leases, with far fewer legal protections and restrictions. Commercial leases are highly customizable and are negotiated between the landlord and the tenant. Here are some of the most common terms found in commercial lease agreements:

• Lease Term: This refers to the duration of the lease and is an important factor in the leasing process. Commercial leases are usually for a specific number of months, and tenants are obligated to pay for the space for the entire lease period. Short-term leases offer more flexibility, while long-term leases provide more certainty and concession options.
• Rent: The base rent is the predetermined amount that a tenant must pay, regardless of operating expenses or revenue. Rentable square feet and usable square feet are calculated differently and impact the base rent.
• Rent Increases: The rent escalation clause explains how much the rent will increase and when. This could be a set amount or a percentage increase.
• Operating Expenses: Operating expenses (op/ex) refer to the building's operating costs, such as utilities, that are passed on to the tenant. In a gross lease, the landlord is responsible for these expenses, while in a net lease, the tenant pays them.
• Security Deposit: Commercial landlords may ask for a security deposit to cover any financial obligations the tenant fails to meet. This can be in the form of a cash deposit or a letter of credit from the tenant's bank.
• Use Clause: This limits how the tenant can use the rented space, including the type of business conducted and the specific products or services offered. An exclusive clause gives the tenant the exclusive right to engage in a particular type of business within the building or mall.
• Maintenance and Utilities: The landlord's lease will typically include a maintenance clause outlining the tenant's responsibilities for maintaining their rented space. In a multi-tenant building, the utilities clause will outline how utilities will be billed and paid for.
• Insurance: Several types of insurance are available to cover the risks of leasing commercial space, including property, liability, rental interruption, and leasehold insurance.
• Subleasing: Subleasing allows tenants to lease unused space in their agreement to another tenant. The original tenant remains responsible for the payment of rent and any defaults by the subtenant.
• Renewal and Expansion Options: A renewal right gives tenants the first option to renew their lease, while an expansion option gives them the first right to lease additional space.
• Termination Options: A termination option allows tenants to cancel the lease before the end of the term. However, it may include a termination penalty, requiring tenants to pay back any "unused" amounts.
• Parking: Parking ratios and costs are important considerations in commercial leases, especially in areas where parking is limited.
• Americans with Disabilities Act (ADA): The ADA requires commercial spaces to be accessible to disabled persons. Tenants are primarily responsible for ensuring their business is ADA-compliant, but landlords may also be required to make ADA upgrades.

Commercial tenant rights

Commercial leases are generally less regulated than residential leases, and commercial tenants are afforded fewer protections. In the US, commercial leases are subject to federal, state, and local real estate regulations, insurance laws, and contract laws. These laws vary from state to state, so it is important to consult an attorney with knowledge of the relevant local laws.

In Colorado, for example, commercial tenants have fewer rights than residential tenants, as commercial parties are assumed to be on a more equal playing field. Colorado law does not regulate most of the terms of a commercial lease. There are no restrictions on rent amounts, assignment or sublease, or maximum lease terms. However, there are some rights and obligations that must be considered.

Rights and Obligations

Commercial tenants have the right to:

• Receive a "Demand for Compliance of Right to Possession" from the landlord before an eviction action can be filed. This allows the tenant three days to either fix the lease violation or vacate the property.
• Not be subjected to self-help evictions, such as the landlord changing the locks.
• Privacy, with the landlord required to give 24 hours' notice before entering the property.
• Expect the landlord to maintain the property, including routine maintenance such as HVAC repairs or outside landscaping.
• Sublease the property, unless the original lease prohibits or restricts it.
• Expect the landlord to make reasonable accommodations for those with disabilities, as required by the Americans with Disabilities Act (ADA).

Commercial tenants are obligated to:

• Pay rent and other charges outlined in the lease, such as building insurance, property taxes, and maintenance costs.
• Comply with permitted use restrictions in the lease, which may limit the type of business activities that can be conducted on the property.
• Comply with exclusive use restrictions in the lease, which may prevent competitors from moving into the same building or area.
• Comply with any other covenants or conditions in the lease, such as restrictions on noise or odours.

Dispute Resolution

In the event of a dispute, commercial tenants have the right to:

• Seek legal advice and representation from an attorney with experience in commercial landlord-tenant law.
• Negotiate with the landlord to resolve the dispute, especially if the lease includes an arbitration clause requiring the use of an arbitrator.
• Take the dispute to court if necessary, although this can be a lengthy and costly process.

It is important to note that commercial leases are generally subject to much more negotiation between the business owners and the landlord. Businesses often need special features in their spaces, and landlords are often willing to extend special offers to attract tenants. Therefore, it is crucial for commercial tenants to carefully review and negotiate the terms of their lease to protect their rights and interests.

Commercial lease disputes

Understanding Commercial Leases

Commercial leases differ significantly from residential leases. Commercial leases offer far fewer protections for tenants and are subject to minimal consumer protection laws. The lease agreement is highly customizable and may include various terms and conditions specific to the landlord's needs. As such, it is crucial to carefully review and negotiate the terms of a commercial lease before signing.

Common Sources of Disputes

• Rent calculations and reviews
• Allocation of property taxes and common area expenses
• Enforcement of operating covenants
• Assignment and subletting restrictions
• Landlord consent for alterations or subleasing
• Improvements, changes, or alterations to the premises
• Expansion or reduction of leased premises
• Options to purchase or rights of first refusal
• Adequacy of maintenance and responsibility for repairs
• Exclusive use rights or prohibited uses
• Permissible commercial activities or use restrictions

Steps to Take When a Dispute Arises

When a dispute arises, the first step is to review the lease agreement to understand how it outlines dispute resolution. Keeping detailed records of the issue, including any relevant correspondence or receipts, is crucial. Depending on the nature of the dispute, the tenant may be able to seek legal recourse, such as an injunction to prevent eviction.

Mediation as a Dispute Resolution Technique

Mediation is a highly effective method for resolving commercial lease disputes. It is often faster and more cost-effective than litigation, allowing parties to preserve their business relationships and reach a mutually agreeable solution. Through mediation, parties can creatively resolve complex issues and maintain control over the outcome, making it more likely that they will abide by the resolution.

Seeking Legal Assistance

When facing a commercial lease dispute, it is essential to seek legal assistance from a qualified attorney or a commercial leasing attorney. They can help navigate the intricacies of the law, protect your rights, and represent you in litigation or arbitration if necessary.

Commercial lease termination

Commercial leases are legally binding contracts, and while it is not impossible to break them, it can be a complex process. Here is a guide on how to navigate a commercial lease termination.

Early Termination Clause

Firstly, check the lease agreement for an early termination clause or break clause. These are not standard in commercial leases, but they can be negotiated before signing. A well-written termination clause should be very specific and detailed. For example: "The tenant may terminate early only after the first year of the lease." There may be expenses associated with including an early termination clause, and tenants may have to pay the landlord's legal costs.

Surrender the Lease

Another option is to communicate with the landlord and ask them to surrender the lease. This is a mutual agreement between the tenant and landlord to end the lease. While the landlord is not legally obligated to agree, it is worth discussing. The landlord may ask for a surrender fee as compensation. If they agree, the decision should be documented in a deed of surrender. This brings an end to the tenant's legal obligations, although they may still have to pay the landlord's legal costs.

Assign the Lease to a New Tenant

With the landlord's consent, the lease can be assigned to a new tenant. The original tenant must get the landlord's consent and document the process in a deed of assignment. The original tenant will usually have to pay the landlord's legal costs for accepting the new lease. However, if the new tenant breaches the lease, the landlord may make legal claims against the original tenant.

Negotiate a Lease Buyout

If there is no contractual early termination option, tenants can attempt to negotiate a lease buyout. This will likely involve penalties and fees.

Termination Letter

If pursuing early termination, the tenant must notify the landlord via an early termination letter, according to the terms of the termination option in the lease agreement. This letter should include the date of planned property vacancy, date of key surrender, request for inspection, new business address, contact information, and reasoning behind the early termination.

Other Options

There are a few other scenarios in which a tenant could break a commercial lease without penalty:

• If the property is in a popular area, the landlord may agree to early termination as they could quickly lease the space again at a higher rate.
• If the landlord has breached an important lease provision.
• If the company has claimed bankruptcy.
• If the landlord agrees to a deed of surrender that explicitly releases the tenant from all lease obligations.
• If the tenant assigns the lease to a related entity with a permitted transfer.

Key Considerations

Commercial leases are very different from residential leases. Commercial leases offer less protection and are less regulated. They are also often longer-term and more flexible when negotiating conditions. It is important to carefully examine and negotiate a commercial lease agreement, as it is a legally binding contract.

Frequently asked questions