How to Review a Commercial Lease Agreement

It is good to know how to review a commercial lease agreement because it serves as a foundation of your relationship with your tenant. Given the economy, a prospective tenant may want to move into a smaller space. Landlords may be eager to keep or attract tenants, given how many they might have lost.

The attorneys at Lusk Law, LLC offer you many landlord-tenant law services, including help with how to review a commercial lease agreement and commercial lease review. We help clients with property-related issues and know very well what to look for in a commercial lease agreement. A commercial lease attorney can ensure that a client’s actions are on a sound legal footing and their interests are protected, no matter how the economy impacts their business.

Commercial Lease Review Checklist

What should be included in a commercial lease agreement? Knowing the answer to this essential question will help keep you from getting into lease problems in the future. In every case, it pays to have an experienced attorney handling all of your lease business. They know what to look for in a commercial lease agreement and can spot red flags a mile away. But even with a lawyer, parties to a lease do well to understand the basic elements of commercial leases and commercial lease preparation.

Each landlord-tenant relationship is unique. Some issues will be more important than others in a particular relationship. Overall, here’s a commercial lease review checklist of things to pay attention to when offering a new lease or if you’re reviewing an existing one.

1. Proofread and double-check

Make sure the information is correct:

  • Address
  • Parties’ names and contact information. Your tenant’s business may have a brand name, but a legal entity with a different name may own it. Make sure the person signing it is the right person to do so and is authorized to sign on behalf of the entity.
  • Rent amount, security deposit, and other fees.

It would likely surprise you how easy it is for parties to make errors relating to basic information found in the contract. For some, it is unfathomable to make basic errors, such as mistakes in names and addresses. However, they do occur frequently, perhaps because it seems unlikely that these types of mistakes would be made in the first place.

2. The agreement protects your interests

Review the agreement and relevant documents to ensure that what was agreed to orally and in written communications (emails and draft leases) is in the final draft. It is not uncommon for parties to unintentionally leave orally agreed-upon terms out of the final written document, especially small but important details. Make sure the details are included; if not, negotiate until you have the lease nailed down. Changing it later will potentially cost you more time and money.

3. Common Area Maintenance (CAM) fees

The tenant pays CAM fees to the landlord. CAM covers the maintenance costs that benefit all tenants (e.g., parking lot maintenance, lighting, snow-removal, and landscaping). The lease should explain how CAM is calculated. It may be based on the number of tenants (if others leave, it hurts those who remain) or the tenant’s square footage. Although this may seem like a minor detail, it is not and should be contemplated with care.

4. Competitors as neighbors?

Tenants may not want a competing business nearby, especially if they’re working in retail or restaurants. This would be bad for a tenant because some customers may try the competitor, increasing the chances of decreased sales or going out of business. This would be bad for you as a property owner as well because it may deprive you of a paying tenant. You’d also face the costs of finding a new tenant and missing out on rent when the space is vacant. Leases may include exclusivity clauses, to prevent this type of competition.

5. Incompatible neighbors?

Is there another kind of business, or their customers, that could discourage your tenant’s customers from coming to their business? A daycare center owner might not want a liquor store or adult store next door. The lease should state the types of tenants allowed in the building or on the property.

6. What’s your time frame?

How long should the term of the lease be? Most commercial leases run for several years with renewal options, so this is a big commitment by both parties. How confident are you that your tenant’s business will generate enough income to pay the lease and its other costs?

It may be worthwhile to explore various lease options to prevent you from getting locked into unfavorable lease terms. Additionally, adding renewal options is one way of earning favor with a paying tenant and keeping them in a property for years, avoiding tenant turnover.

7. Net or gross or percentage of sales?

With a net lease, the tenant pays rent plus part of the property’s expenses (maintenance fees, insurance, and taxes). In a gross lease, the tenant pays just rent. If the tenant is a retail store, rent could also include a percentage of the sales generated in the space.

8. Premises description

The space should be accurately described, including square footage and important amenities. The description should also include any damaged or inoperable equipment, furniture, or facilities. Any potential or actual hazards should also be described in sufficient detail.

9. Premises preparation

If either or both parties will perform work on the premises, the scope of that work should be included. The parties need to clearly understand who will do what. If this is explained in exhibits attached to the lease, the information shouldn’t conflict with the lease terms. If one party needs permission from the other to do work, include deadlines so the process moves along. Consequences should be spelled out if deadlines are missed.

10. Allowed uses/Use restrictions

What will you allow your tenant to do? What do you want them not to do (like compete with another tenant)? What are the penalties/remedies in case a tenant breaches these limitations?

11. Exit strategy

A tenant may want to end the lease early if the business is unsuccessful. You should want to end a lease early if a tenant doesn’t comply with the lease terms. If you allow a tenant to leave by subletting the space, you should have the final say over who the new tenant will be and the conditions under which they occupy the space. Spelling out the precise terms of exits and the roles and responsibilities of each party will help immensely in avoiding lease conflicts.

12. Default provisions

How much can you tolerate before evicting a tenant? You should spell out when a rent payment is late and the consequences. Default provisions should also include any other fees or costs the tenant is obligated to pay. There should be a process by which you give notice of a default and the tenant has an opportunity to resolve the problem.

The clearer these default provisions are, the easier it is to deal with a problem tenant. As with other parts of the lease, have your attorney thoroughly review and create default provisions that protect you from potential tenant issues.

Commercial Lease Review

You may have standard lease provisions and language you use. You may also know the answer to the question, “What should be included in a commercial lease agreement?” Yet it is good to have an attorney perform a commercial lease review periodically. The law changes, so your lease may need to adapt. We may suggest language that could strengthen your rights and protections. There may be issues or provisions that you’ve overlooked. If a tenant wants something out of the ordinary in the lease, we can help with that, too.

Remember that leases are contracts, and contracts work best when they do not need changing after signing. Post-signing contract changes tend to cost businesses and property owners time, lost business, and money. However, with a commercial lease review performed by an experienced attorney, you are more likely to get things right the first time and avoid having to make costly changes later.

Hiring a Lawyer to Review a Commercial Lease Agreement Could Be the Ounce of Prevention Worth a Pound of Cure

You may have taken a lease agreement off the internet and used it to save money. It may be poorly written, or won’t protect your interests; important parts of it may not be enforceable under Maryland law. The problems it may cause could be far, far more costly than the money you thought you might save by not using our services.

We help our clients avoid expensive mistakes, like using poorly drafted or unenforceable lease agreements. If you have questions about leases, how to review a commercial lease agreement, or need help with a commercial lease dispute, contact Lusk Law, LLC today. We assist clients in Frederick, MD, and they trust us with several types of legal matters. Give us a call at (443) 535-9715 to schedule an appointment.