Understanding The Complexities Of A Commercial Lease

brad zackson lease guide
The commercial lease is traditionally a complex document consisting of pages and pages of riders and addendums in legal terminology. Once signed, a new or existing tenant of an industrial or commercial property is legally bound to abide by the terms set forth in the lease. It, therefore, is extremely important that the tenant and the landlord fully understand exactly what they are agreeing to before executing a lease.

Interpreting An Industrial Lease

The parties of a commercial lease agreement are signing a multi-year commitment that can frequently exceed 10 or even 20 years or more in term. So, in the best interest of everyone involved, it is recommended that you take the time to understand the implications and the consequences in the event of any future non-compliance issues with the lease. Both the landlord and the tenant will benefit from equitable lease terms that are written to best protect their own interests. If you are working with an experienced commercial real estate agent, he or she can help you to interpret the lease. The agent can also be helpful during the negotiations of the lease terms, such as the lease options and rent increases.

The Many Different Types Of Leases

One of the most confusing legal aspects of an industrial lease is the determination of who pays for what, and at what point is an expense a landlord’s responsibility or a tenant’s responsibility.
The industrial lease is most commonly drawn up as either a gross lease or a net lease. When only one tenant will occupy the entire property, a net lease or a modified net lease can be deemed appropriate. The use of a gross lease, or a variation of it, is sometimes considered more appropriate for use in cases where there will be more than one tenant occupying space in the same building or complex.

Other Charges Above And Beyond The Base Rent

The terms of a gross lease in which the landlord pays the taxes, property maintenance, property and building insurance premiums, and some or all of the utilities is called a full-service lease. The tenant is obligated to pay the rent each month to the landlord. After year one, or what is commonly called the base year, the tenant pays his share of the increases in insurance, taxes and other expenses to the landlord. These types of additional charges due the landlord are included in the lease agreement, and they are known as pass-throughs.

A gross lease can be modified, and in such cases, some of the above-mentioned expenses become the tenant’s responsibility. In a triple-net lease, all of the operating expenses are passed through to the tenant. This type of lease is frequently used for industrial leases. Net leases can also be variable in nature, and the tenant can be held responsible for certain operating expenses.