Negotiating a Commercial Lease Agreement

Take the time to understand the commercial lease agreement and how each clause can impact both the investment property owner and tenants.  Using a well written lease that benefits both parties is key to a successful tenancy.  Understanding each provision and, if necessary, modifying to be agreed upon by both parties, is essential.  This is why it is critical to enlist the help of a Auburn, Nevada City, or Grass Valley CA commercial property manager who can use their knowledge to produce a strong lease agreement.  So, what are the different types of leases, clauses, provisions, etc. that can greatly affect a commercial lease agreement?  While there are hundreds, I will touch on some of the major ones in this blog post:

  1. Net-Ness of a Lease: Net-ness refers to the expenses tenant will pay.  Although the different types listed below seem simple, there can be many negotiations included, which alter the simplicity and understanding of the basic lease types.  For example, a lease could be Triple Net but the Tenant could negotiate out a certain maintenance expenses they feel they should not have to pay.
    1. Gross Net: Tenant only pays base rent and no other expenses.
    2. Single Net (aka N Lease): Tenant pays base rent and real estate taxes.
    3. Double Net (aka Net-Net Lease, NN Lease): Tenant pays base rent, real estate taxes, and building insurance.
    4. Triple Net (aka Net-Net-Net Lease, NNN Lease or Fully-Net Lease): Tenant pays base rent, real estate taxes, building insurance and maintenance.
    5. Modified Net
  2. Modifications/Alterations to Leased Space: Any standard or well-written commercial lease agreement should include a paragraph about modifications/alterations to the leased space.  CAR (California Association of Realtors) Commercial Lease Agreement states the following under the Alterations paragraph: “Tenant shall not make any alterations in or about the Premises, including installation of trade fixtures and signs, without Landlord’s prior written consent, which shall not be unreasonably withheld. Any alterations to the Premises shall be done according to Law and with required permits. Tenant shall give Landlord advance notice of the commencement date of any planned alteration, so that Landlord, at its option, may post a Notice of Non-Responsibility to prevent potential liens against Landlord’s interest in the Premises. Landlord may also require Tenant to provide Landlord with lien releases from any contractor performing work on the Premises.”  Beyond this, you may consider adding additional provisions such as:
    1. Amount of insurance required for contractors/vendors.
    2. Work must be done by licensed contractors only.
    3. Tenant responsible for all costs.
    4. Tenant responsible for construction zones including vehicles not to block other businesses, entrances, exits, construction debris is cleans up daily, saftey.
    5. Owner to have final inspection and written approval at completion.
  3. Assignment/Subletting: This can be a very important paragraph in a commercial lease agreement.  Depending on the business type, it may or may not be necessary to allow assigning/subletting.  My advice if you allow either: add a clause which gives the landlord power to screen and qualify any sub-lessees.
  4. CAM or CAE (Common Area Maintenance or Common Area Expenses): Pass-through expenses can include various charges to the tenant.   This paragraph in the commercial lease agreement along with the maintenance paragraph should make it very clear as to what expenses are paid by who.  These clauses typically have a  preface of “including but not limited to” as well as an ending similar to “and any other necessary and/or related expenses which may be incurred”.  Charges are most commonly based on the total square footage of the space vs. the square footage of the premises in question.  The charges passed to tenant can be actual (typically base on prior years amounts) or estimated.   It is the landlord’s responsibility to supply tenant with an annual letter detailing the increase/decrease in any CAM/CAE charges.  Tenant can request, at any time, invoices for charges, which landlord must produce.  Because the accounting for this process can be overwhelming, enlisting the help of a reputable Nevada County or Placer County commercial property management company may be beneficial for most investment property owners.