2. Introduction
• A commercial lease is a complex legal document that spells out
many aspects of the relationship between the lessor and the
tenant.
• A valid lease has the same four requirements as any contract: (1)
legally competent parties, (2) mutual consent between the parties,
(3) a lawful objective, and (4) sufficient consideration.
• In most states, a provision of the statute of frauds requires that
any lease for more than one year must be in writing to be legally
enforceable.
• The lease agreement binds both the lessor (lessor) and lessee
(tenant) to specific obligations.
• A leasehold is created when a lessor signs a lease agreement that
gives temporary possession and use to the tenant in return for the
payment of rent.
• The four types of leasehold estates are described by the duration
of the tenancy: (1) periodic tenancy, (2) tenancy for years, (3)
tenancy at sufferance, and (4) tenancy at will.
3. Leasehold (continued)
• Periodic Tenancy
o Most common type of lease agreement and is seldom used
for commercial leases
o For an indefinite period of time with rent payment
• Tenancy for Years
o Commercial leases are typically tenancy for years
agreements
o Has a fixed term and definite end date
o Does not necessarily continue for years; it can be for a
period of days, weeks, months, or years
o These leases frequently include a renewal option clause in
which the lessor and tenant agree to allow the extension of
the lease under certain specific terms.
4. Leasehold (continued)
• Tenancy at Sufferance
o Occurs when a tenant continues to occupy the property after
the expiration of a lease without having signed a new lease
agreement
o The tenant is called a holdover tenant.
o For a commercial tenancy of more than a year, the new
tenancy is year-to-year; otherwise, it is the same period as
the period in the original lease.
• Tenancy at Will
o When there is no written agreement between the lessor and
tenant
o A tenancy at will is a rental agreement that endures as long
as both parties are willing.
5. Types of Lease Payments
• Gross Lease
o Tenants pay rental payments only
o The lessor pays all of the costs for operating the premises—common area
maintenance (CAM), utilities (water, electricity, heat, A/C), property taxes and
special assessments, insurance premiums, and other costs associated with
operating and maintaining the property.
o An expense stop clause puts a limit on the lessor’s responsibility for the
costs of operating the premises.
• Net Lease
o Requires the tenant to reimburse the lessor for a portion of the basic
property expenses, such as maintenance, taxes, and insurance
o In a single net lease, the tenant pays the monthly rent plus property taxes
o In a double net lease, the tenant pays property taxes and insurance
premiums
o In a triple net lease, the tenant reimburses the lessor for CAM fees, property
taxes, insurance costs, and sometimes, structural repairs
o An absolute net lease requires the tenant to pay for all the expenses of
operating and maintaining the property, including major repairs and any
capital expenditures
6. Types of Lease Payments (continued)
• Index Lease
o Charges a base rent and includes an escalation clause
in the lease that provides protection against inflation
for the property owner.
o The escalation clause is a lease provision that allows
the lessor to increase rental rates at a specific time or
under specific circumstances.
o The escalation clause ties rent increases to a selected
reliable index, such as the Consumer Price Index (CPI).
The Consumer Price Indexes (CPI) program produces
monthly data on changes in the prices paid by urban
consumers for a representative basket of goods and
services.
7. Types of Lease Payments (continued)
• Graduated Lease
o A long-term lease with an escalation clause that allows
for a rent increase based upon the occurrence of a
certain event
o Another type of graduated lease agreement may
simply consist of laddered increases scheduled to
occur at specific times.
• Percentage Lease
o A lease that charges a fixed base rent plus a
percentage of the gross sales of the tenant
8. Typical Lease Clauses
• Names and Signatures
o The names of both the lessor (owner or property manager) and the lessee (tenant) must
be documented on the lease.
o You should not take possession or make any improvements to the property until the
lease has been fully executed (signed) by all the parties to the lease.
o Depending on state law, a lease for over a year may require witnesses and a notary
public to notarize signatures.
• Description of the Premises
o The property you plan to lease should be described clearly with complete street address
and suite number.
o The gross area is the total building square footage.
o The rentable area is the total square footage for which a tenant is charged rent.
o The usable area is the space that is actually occupied by the tenant.
o The difference between the number of square feet (SF) in the lease and the actual
measurable square footage within the demising walls is called the space loss factor.
o The expansion option, or option to lease additional space, gives you the right to increase
the amount of space if and when it is needed.
o The right of first refusal clause would give you first choice on any available empty space.
9. Typical Lease Clauses (continued)
• Premise Use
o All owners want to protect their properties from
devaluation due to inappropriate uses.
o Tenant mix is the composition of tenants and the
range of goods and services they provide.
o An exclusivity clause gives the tenant with the clause
the exclusive right to sell his or her product or service
on the property.
10. Typical Lease Clauses (continued)
• Term of Lease
o The term of the lease (time duration) in days, weeks,
months, or years and the beginning and ending dates of the
lease must be clearly stated.
o Renewal Options
A renewal option clause gives the tenant the right to extend
the lease term for a certain period, on specified terms.
o Early Termination Clause
Leases may include an early termination clause, which allows
tenants to cancel their lease before it expires.
The lessor usually receives some form of compensation if the
tenant exercises the option to leave early. Sometimes this
clause is called a kick-out clause.
11. Typical Lease Clauses (continued)
• Rent Amount
o The lease must indicate the amount of rent to be paid, when
it is due, and to whom it is to be given.
o Charges, such as late fees, CAM (common area maintenance)
reimbursements, or percentage rents are detailed in other
clauses of the lease.
o Rent concessions can include free rent for a period of time, a
reduction of rent, or tenant improvements.
• Security Deposit
o The security deposit is generally equal to one or two-months
rent.
o The security deposit is refundable providing there is no
damage to the space and there is no past due rent or CAM
reimbursements.
12. Typical Lease Clauses (continued)
• Due Diligence Clause
o Gives you the necessary time in the initial stages of the lease
to investigate the lease site, obtain necessary permits from
the city, and determine if there are any obstacles that cannot
be overcome before committing to the remaining term of the
lease
o Due diligence periods provided by the owner are generally
60 days and allow the tenant a contingency period in which
to cancel the agreement.
• Premise Possession
o In some states, the new tenant is responsible for evicting
previous tenants if they have overstayed their lease.
o However, most states obligate the lessor to give the tenant
occupancy of the premises on the date described in the
lease.
13. Typical Lease Clauses (continued)
• Alterations and Improvements Clause
o A vanilla box or shell is a leased space having only walls,
concrete floor, lighting, HVAC, standard plumbing,
bathrooms, and electrical outlets.
o The work letter is a letter or an attachment to the lease
detailing the amount and type of work performed by the
lessor and the tenant in preparing the property for
occupancy by the tenant.
• Signage
o Common Signage Problems
All the tenants compete for attention by using the largest,
brightest signs possible, and the whole property looks
terrible.
Tenants use different sizes and styles for signs.
The local zoning department develops restrictions on erected
signs.
14. Typical Lease Clauses (continued)
• Taxes and Expenses
o If you are paying expenses, you should have the right
to audit the records upon which the expenses are
based.
o Pay Real Property Taxes
The tenant’s share should be calculated based on the area
rented by the tenant and not the building’s gross area.
o Tax and Insurance Participation
Requires the tenant to pay rent, plus a pro rata share of
both the property taxes and the insurance
o Utilities
The responsibility for payment of utilities (electricity, gas,
water, and sewer) must be clearly stated in the lease.
15. Typical Lease Clauses (continued)
• CAM Reimbursement
o Expense of operations and common area maintenance
of the property that is shared by the lessor and the
tenants
o The total leasable floor space does not include
common areas or other areas not being leased by the
tenant. In shopping centers or malls, this is called
gross leasable area (GLA) or floor area.
o Basic CAM Fees
Insurance premiums, landscaping, maintenance and
repairs, real property taxes, security, special tax
assessment, utilities
16. Typical Lease Clauses (continued)
• Maintenance & Repairs
o Specifies who maintains and makes repairs to the
premises
• Insurance
o Standard commercial lease forms require both you and
the lessor to have liability and property insurance.
o The lessor may specify the specific dollar amount of
liability coverage required by the tenant.
o Tenant’s property insurance covers the personal
property, fixtures, equipment, and any improvements
made by the tenant.
17. Typical Lease Clauses (continued)
• Limitation of Liability
o The limitation of liability clause is designed so that you agree
not to file suit against the lessor for any accident that may occur
at the premises.
o It protects the lessor if tenants or their guests are injured while
using one of the tenants’ services.
• Entry by Lessor
o This clause states the required notification the lessor must give
before entering the tenant’s unit to make needed repairs,
alterations, or improvements.
• Compliance with Law Clause
o Designates which party is responsible for compliance with new
laws from the local, state, and national governments.
o Includes modifications to the building in order to comply with
requirements of the Americans with Disabilities Act, or local or
state ordinances
18. Typical Lease Clauses (continued)
• Assigning a Lease or Subletting
o Assigning the lease releases you from primary liability on the
lease whereas subletting makes you a landlord responsible for
collecting rent and passing it on to the original lessor.
o An assignment is the transfer of the entire leasehold estate to a
new person, who is called an assignee.
o The original tenant (assignor) steps out of primary responsibility
for the lease and a new tenant (assignee) becomes responsible
to the lessor for all the terms of the original rental agreement.
o A sublease is an arrangement in which a lessee (tenant) rents
the same property on which he or she has a lease to another
party.
o In this case, the original tenant becomes a sublessor and the
new tenant is a sublessee.
o A sandwich lease is so named because the original tenant is
technically sandwiched between the new tenant and the lessor
in the collection and payment of rent.
19. Typical Lease Clauses (continued)
• Appointment of a Receiver Clause
o Outlines what is to take place if one of the parties
involved in the agreement files for bankruptcy
o It details the steps a lessor can take if a tenant files for
bankruptcy, and the steps a tenant can take if the
property owner files for bankruptcy.
• Damage or Destruction Clause
o Lease provisions should address rent abatement
issues, definition of destruction and termination of
lease or relocation within the same center.
20. Typical Lease Clauses (continued)
• Tenant Going Dark Rights
o Will you get a substantial rent reduction, an option to relocate within the
center, or the right to terminate your lease if occupancy drops below a
predetermined percentage?
o One of the keys to this lease provision is defining a major tenant.
• Condemnation
o It is important to note that if the government condemns a leased
property or acquires it by eminent domain, the tenant may terminate
the lease.
• Breach and Default
o A breach of contract is a failure to perform on part or all of the terms
and conditions of a contract without a legal excuse.
o Default occurs if the breaching party does not cure the breach after
receipt of a written demand from the other party.
o The default clause pertains to the nonperformance of a duty or
obligation in the contract (breach of contract) without a legal excuse.
21. Typical Lease Clauses (continued)
• Mediation/Arbitration
o Mediation is the process in which a neutral, uninterested
third party (mediator) helps the parties involved in a dispute
to negotiate a settlement or other resolution.
• Holdover
o A holdover clause specifies the conditions required for the
tenant to stay beyond the term of the lease.
• Recording the Lease
o A lease that is recorded is an encumbrance on the property.
o Some states require that leases for more than 10 years be
recorded.
