A lease as the transfer of the exclusive right to use specific real estate for a definable period of time. Commercial leases involve premises to be stores or the sale of goods or services at retail.

Commercial space is usually marketed on a dollars per square foot basis. However, not all square feet are useable. Some stores contain space which is unusable or hard to use, at least for certain tenants. Also, not all measurements of square footage are comparable. Some landlords measure from the outside wall surfaces and include some common area space, such as half the hallway between two stores. A prospective tenant should be aware of this and make its own determination. Landlords will usually disclose how they measure if asked.

Commercial rents are usually a set amount per month or a percentage of sales or some combination of the two. Set amounts usually are scheduled to rise each year. Rents based on a percentage of sales often have a set monthly base amount (minimum rent) and sometimes the percentage varies with the level of sales (usually going down as sales increase).

Usually, in addition to the fixed or percentage amount, the rent includes some or all of the expenses of the premises which the tenant must pay. These expenses can include real estate taxes, insurance, utilities, maintenance, common area maintenance and advertising in shopping centers, and any other cost of the premises. The cost of the landlord's mortgage payments are not usually included. Since the lease term is usually fairly long the object is to insulate the landlord against the risks of inflation.

"Net lease" is the term for a lease where the tenant pays real estate taxes, utilities, insurance and maintenance expenses as well as rent. This is also called a triple net lease. When the landlord continues to pay maintenance expenses while the tenant pays other expenses the lease is often called a "double net" lease.

A tenant may make the space rented and even all property in the area more valuable because of its successful store. The tenant wants to be protected against the landlord raising the rent because of the increased value which the tenant is responsible for. From that point of view the tenant wants a lease with a fixed monthly payment for as long as the tenant can get. However, the tenant wants options to renew at set rental rates and even an option to purchase the building at a set price.

The landlord is usually amenable to options to renew so long as its rent is protected and the tenant pays the costs of the property. Sometimes the fixed rent just goes up each lease year and each option year or a price index is used to change the rent. In other leases percentage rent protects the landlord. When it comes to an option to purchase the building the tenant wants a set price determined now and the landlord wants a price to be determined at the time of sale by appraisal.

In shopping centers some leases provide that if certain other stores or a certain percentage of other stores in the center are not open for business then the tenant's rent is reduced. Shopping center leases also often provide that if the tenant's sales do not exceed a specific amount in a certain period the tenant has an option to terminate.

If the lease provides for percentage rent there are often detailed provisions defining the sales to which the percentage is to be applied and detailed requirements for what financial information the tenant must provide the landlord. Shopping center landlords often want information on tenant sales even if there is no percentage rent.

Tenants should be limited liability entities such as corporations or limited liability companies. Ideally they should not be the entity that operates the business in the store. With a limited liability entity as tenant, the owners of the tenant are not liable for the rent if the store fails. With a separate limited liability entity as a tenant the lease liabilities, do not affect the store which may have other locations. Landlords, on the other hand, usually want some person or entity of substance liable for the lease, or part of it. For this reason they often want the lease guaranteed by the owners of the business or some entity with significant assets. Who the guarantors will be, how long their guaranty will last and the dollar limit on their guaranty are all matters for negotiation.

The legal requirements for occupancy should be investigated by the tenant. These include zoning and building permits and certificates of occupancy for the premises when construction is involved. A tenant must check the zoning and should get a representation as to the zoning made a part of the lease and the existence of the lease should be subject to that zoning being in effect. Who is to get zoning changes, building permits or certificates of occupancy should be specified and who will pay for them should be covered. Since the occupants of real estate can be liable for clean up of adverse environmental conditions on the property the lease should also cover who will ultimately be responsible for these conditions as between the landlord and the tenant. The tenant might also want to condition the lease on a satisfactory environmental report.

Many commercial leases involve construction, either of the premises to begin with or of things in the interior of the building (buildout). What is to be done, who will do it, who will pay for it and when it will be done should be specified. Sometimes landlords do the work and incorporate the cost into the rent. Sometimes the tenants do the work. Sometime tenants who do the work get reimbursement from the landlord or a rent credit when the work is done.

The lease should also specify how it will be determined if the work is done and done satisfactorily and the consequences of the work not being done on time or satisfactorily.

Many commercial leases provide for a rent free period such as one to three months after the tenant takes possession to allow the required work to be done.

Most commercial leases specify what the premises can be used for and the tenant is restricted to that use. In shopping centers the leases also often grant the tenant exclusive rights to the sale of some items in the center. In addition, the tenant is often prohibited from opening a location within a specific distance from the center.

Tenants are usually going to pay some or all of the expenses in commercial leases, especially utilities, real estate taxes, insurance and common area maintenance expenses in shopping centers. What these will be and who will pay what should be defined. Sometimes the tenant will want limits on increases. The tenant will always want separate metering of utilities and that should be a requirement of the lease, which should specify who will install the meters and who will pay for that. Tenants should find out what current expenses are and should get a landlord representation as to what they are put in the lease.

In the absence of any provision to the contrary tenants are responsible for ordinary maintenance of the property. It is a good idea to specify who is responsible for what, including a provision that the landlord is liable for structural repairs.

Who will carry what insurance and who will be paid for it is usually covered. Regardless of what the lease says the tenant and landlord should both independently examine if they have adequate insurance coverage. The lease often specifies what happens if part or all of the premises are destroyed or taken and who gets the insurance and whether or not they must rebuild and whether or not the lease terminates or part of the rent abates.

In shopping center leases the landlord often wants a right to relocate the tenant in certain circumstances. The tenant wants to put limits on where it can be relocated to and wants the full costs of relocation and business interruption paid.

Assignment and subletting are things a tenant wants to do if it no longer wants the store. The landlord may not like this because it wants a sound tenant in the store, so it usually tries to prohibit these things or place significant limits on them. If there is a use restriction in the lease that places significant limits on assignment or subletting. If there is no use restriction and there is a percentage rent, keep in mind that different retail operations have vastly different gross sales per square foot. If a supermarket with high gross sales subleases to a clothing store with lower gross sales the percentage rent would go down drastically.

Liabilities and remedies are usually extensively covered in commercial leases. Typically a landlord wants to say it is liable for nothing, even its own gross negligence. In drafting this thought landlords often tender a lease saying they are not even liable for breach of the lease. Landlords also want to say that if they are liable for anything and there is a judgment against them it can be enforced only against their interest in the premises leased and not the other assets they own. Commercial leases also often provide that the tenant waives its rights to a jury trial, to make counterclaims (such as the landlord's breach of the lease), and that the tenant waives a variety of other defenses. Often the lease provides that the landlord can confess judgment against the tenant. What landlords are trying to do is make it easier to get the store back - to get the tenant out - in cases of default. Getting the store back and re-renting it to a paying tenant is far more important than chasing a defunct tenant to collect money.

Commercial leases usually all provide penalties for late payment and drastically increased rent for holdovers. They often provide that the landlord's (or prevailing party's) legal expenses must be paid by the other party.

Regardless of what could be called usual or common, everything in a lease is negotiable.

The first opportunity to do this is when the prospective tenant contacts the prospective landlord or the leasing agent. Usually only the basics such as rent and terms are discussed. Then the landlord prepares a lease with a lot of things which were not discussed in it. The more that can be negotiated upfront before the lease is prepared, the better.

Donald M. Thompson * Chicago Commercial Leases - 55 W. Monroe #3950; Chicago, IL 60603
Ph: 312-782-0844 * Fax: 312-201-1436 * Email: donthompsonlaw@sbcglobal.net