A well constructed commercial lease is very important when leasing a property, but at times they can be long and confusing. But a great lease should be anything but long and confusing, they should be simple and straight to the point.
In fact all commercial leases should essentially be the same; a number of our own landlord and tenant reps use the same lease template for all of their commercial property leases. Creating an easy to use and understandable lease template makes all commercial lease transactions smooth and simple, avoiding confusion and conflict between both parties.
We’ve broken down a commercial lease into its 4 key elements, to help landlord and tenant reps create their own lease templates to use for all of their own transactions. It’s essential to remember that all leases in their final stages should be drawn up by an attorney that specializes in commercial real estate before both parties sign off on a lease.
1. Letter of Intent (LOI)
A Letter of Intent helps prospective tenants edge forward to signing a lease that’s inclusive of their plans for the property in years to come. LOIs vary from deal-to-deal, but typically range anywhere from 10-25 pages and are non-binding. Creating a LOI is usually done by the renter/tenant to show that they’re serious about securing the property before a lease is created and negotiated by both parties.
2. Who, What, Where, When, and Why?
All leases should begin by answering these basic questions. Who are the parties involved? What type of property is being leased? Where is the property located? When are the occupancy and rent payment dates? And finally, why or of what purpose will the property be for? Even though these are simple questions, they should be answered in some detail to insure that both parties are clear about the transaction being made.
3. Lease Terms & Options to Extend
The third key element to include in a commercial lease would be lease terms & the option to extend. Lease terms allow both parties to lay everything out on the table, what is the base rent? What does the tenant pay versus the landlord? What are the permitted uses of the space? All of which are negotiable, both parties have the right to negotiate these terms before a lease is drafted by an attorney and signed by the landlord and the tenant.
“Options” is the right, not the obligation to lease in the future. A typical deal is a 5-year lease with the option to renew again in 5 years. Providing the option to extend a lease does not necessarily give a landlord a competitive advantage, but instead it allows the tenant to renew a lease at a “predetermined fixed price as opposed to a fair market price,” according to an article by All Business on the topic.
Probably the most important part of a lease. The clauses of a lease declare what the rights and responsibilities of both the landlord and the tenant are. There are a number of clauses that can and should be included in a lease, each of which help paint a picture of what can and cannot be done with the property in question. One of which is the “Quiet Enjoyment Clause”, which is the right to the undisturbed use and enjoyment of a real estate property by a tenant and a landlord. For a list of different clauses to include in a lease, check out Landlordology.com’s “7 Extraordinary Lease Clauses That I Can’t Live Without.”