A lease is an agreement granting use or occupation of real asset while a singular period in transfer for a specified rent. At common law, the lease was traditionally regarded as a conveyance of interest in land, subject to the philosophy of caveat emptor ("let the buyer beware"). The landlord was only required to deliver possession to the tenant; the tenant, in return, was required to pay rent to the landlord. Davidow v. Inwood North professional Group, 747 S.W. 2d 373, 375 (Tex. 1988). The modern commercial lease, however, is a complicated instrument that spells out many aspects of the association in the middle of landlord and tenant, along with tenant's use of the property, services that will be provided by the landlord, funds of costs related with maintenance of the leasehold, accountability for utilities, improvements to the premises, insurance, assignment and subletting, events of default, remedies of the parties, expansion rights, and options to increase the lease term.
Commercial leases can be described in four categories: gross, modified gross, triple net, and absolute net. A gross lease does not wish the tenant to reimburse the landlord for any of the expenses that the landlord might incur in carrying out of the premises. Under a gross lease, the tenant pays base rent and the landlord absorbs all costs for common area maintenance ("Cam"), real asset taxes, landlord's insurance, and other charges related with the carrying out and maintenance of the property. A modified gross lease typically requires the tenant to reimburse landlord for "pass through" costs over a stated cost stop or base year. For example, the tenant may be required to reimburse landlord for all Cam over .00 per square foot, or alternatively, the tenant may be required to reimburse landlord for all Cam in excess of base year 2005. In most situations, the commercial tenant will be asked to sign a "triple net" lease, which requires the tenant to reimburse landlord for Cam, real estate taxes, and landlord's insurance. The "pass through" costs included in a "triple net" lease can vary, and can contain added items other than just Cam, taxes, and insurance. Thus, a prospective tenant will be well served to report a proposed lease with counsel to ensure that tenant understands the nature and type of pass straight through costs it will be improbable to suck up under the lease. Also, in determined circumstances, a landlord may utilize a "net" or "absolute net" lease, which requires the tenant to suck up All costs of maintenance and carrying out of the property, along with capital expenditures and major repairs. Typically, an absolute net lease is utilized where the tenant is the sole and 100% occupant of the construction - for example, a restaurant or an office construction occupied by one tenant.
Rent A Center
Commercial leases can be added described by the type of use related with the asset - office, retail, warehouse, pad, or "ground". An office lease is ordinarily used in structure intended for non-industrial enterprise use. retail leases are ordinarily utilized for shopping malls and strip centers. storage leases are ordinarily seen for commercial or light commercial uses. Pad or ground leases are often used for restaurant premises or for premises where the tenant will be responsible for construction and maintaining the structure. Texas law does not wish a commercial landlord to utilize any specific form of lease, and the type of lease a prospective tenant may be faced with signing will vary by the type of building, intended use of the premises, and preference of the landlord.
The lease's period and base rent are of primary significance to the commercial tenant. Usually, a commercial lease is for a term of 5 to 20 years with fixed escalations in base rent or escalations based on an economic index, like the consumer price index. Also, the tenant may be offered options to increase the lease term or enlarge into adjacent or other areas of the property. Depending on the asset and the landlord, lease term and base rent may be negotiable. As a general rule, the larger the space tenant intends to occupy, the greater the flexibility the landlord will show in negotiating provisions in the lease. However, if a asset enjoys a high occupancy rate, a landlord will be less likely to show leeway in negotiating the economic terms of the lease. Yet, I am reminded of two great adages of the commercial world: (1) all is negotiable; and (2) if you don't ask, you won't know.
Also, a tenant should take care to read and understand the record of the premises contained in the lease. Most commercial leases are based on "rentable square feet", a amount which is commonly larger than "usable square feet". The tenant's rent and accountability for refund of pass-throughs (Cam, taxes, insurance, utilities, etc.) are commonly based on the rentable square feet of the premises. Discrepancies in square footage and boundary lines should be resolved prior to carrying out of the lease, or the tenant could face unforeseen costs or potential litigation.
Many landlords offer a tenant "build out allowance" as an inducement to lease the premises. These sums, however, do not recite "free" money and landlord's cost of the allowance is tied to specific conditions in the lease. For example, if the tenant breaches the lease and abandons the premises prior to the end of the lease term, the tenant may have to repay the build out allowance, along with landlord's other damages. The tenant should make sure it understands when and under what circumstances the build out allowance will be paid.
Additionally, the tenant should understand his "lease commencement date" and "lease expiration date". The lease commencement date may or may not be on the date tenant occupies the premises. Also, the landlord may have promised the tenant a 60 month term but the lease could contribute a fixed expiration date for a term of less than 60 months. Again, meticulous scrutiny of the lease is required.
In expanding to base rent, the tenant customarily will be asked to pay "additional rent", which constitutes pass-throughs (Cam, taxes, and insurance) and any other charges that landlord might deem to contain in your lease. Cam, pass-throughs, and other charges reimbursable under the lease are the primary source of tension in the modern commercial landlord/tenant relationship. The tenant wants the certainty of knowing what his rent and charges are going to be on a monthly and every year basis. The landlord wants protection from unexpected rises in taxes or the costs of providing services to the property. The key: read your lease and Know every payment you will be faced with once your tenancy begins.
In the retail context, in expanding to base and added rent, the prospective tenant is often asked to pay landlord a ration of tenant's gross sales on a monthly or quarterly basis. The landlord commonly justifies these charges as a valuable component of compensating landlord for providing a vibrant mall or strip town for tenant to conduct business. In most commercially viable retail property, cost of ration rent is unavoidable. However, the "breakpoint" and amount of ration rent should be negotiated.
Another area of significance to the commercial tenant is the services that will be provided by landlord and refund of landlord for those services. Similarly, tenant should understand those services that landlord will not provide, because tenant will be responsible for those services as an out of pocket expense. Further, unless the lease is gross, the landlord should recognize the components that constitute the costs of operating the "common area" for which it seeks refund straight through tenant's monthly Cam charges. The definition of Cam varies from lease to lease based on landlord preference, the type of property, and the negotiations of the parties. If a gross lease is not available, the tenant should negotiate the items to be included in Cam, the items that will not be included in Cam, and an every year cap or limit on expenses that landlord may endeavor to pass straight through to tenant.
The landlord will commonly want refund for tenant's share of real asset taxes and landlord's insurance costs. The lease should contribute a definition of "tenant's share" or "tenant's proportionate share" based on the square footage tenant will occupy versus the square footage of the building. The commercial tenant must have a full comprehension of all these provisions prior to signing the lease.
Key provisions in the commercial lease define the events of tenant's default and landlord's remedies for tenant's default. The tenant should also address what constitutes landlord's default and tenant's remedies. Tenant default provisions are commonly defined by two categories: (1) economic defaults; and, (2) non-economic defaults. Economic default provisions deal with failure to pay rent, failure to pay for charges assessed under the lease, failure to pay taxes when due, etc. Non-economic default provisions typically refer to other provisions in the lease - use of the property, hours of operation, or failure to contribute services required by tenant under the lease. It is valuable that the tenant have a full comprehension of (1) what constitutes an event of default; (2) tenant's right to cure, if any; and (3) landlord's remedies for tenant's default.
Assignment and subletting provisions are also foremost to the tenant. Texas law prohibits subletting without the consent of the landlord. Tex. Prop. Code §91.005 (2005). If the tenant desires to sell the business, merge with other business, or change the entity under which it conducts business, lease provisions regarding assignment and subletting will come into play. Many leases contribute that the tenant may assign or sublet the premises with the consent of the landlord, which consent "shall not be unreasonably withheld". Obviously, the more flexibility the tenant has in its assignment and subletting provisions, the more flexibility the tenant will have in the conduct and prospective sale of its business.
The modern commercial lease will commonly address landlord and tenant's accountability for accidents and personal injury, casualty, damage to the building, and eminent domain. These provisions vary by jurisdiction, landlord, building, tenant, and use of the property. The tenant should report these provisions completely with counsel to see if they meet the tenant's risk expectations with respect to the property.
The tenant may also seek options to increase the term of the lease. The selection clause should state the amount of options ready to the tenant, the term of each option, the rent for each selection period or the method for determining rent for each selection period, and the method tenant will utilize to rehearsal the option. Also, the tenant may want to contain expansion possession related with the premises, which can contain a "right of first refusal", "right of first offer", or a general expansion right granted with respect to determined space or areas in the construction or property.
In sum, the commercial lease will address, in great detail, the aspects of the association in the middle of landlord and tenant, and will vary by use, location, landlord preference, tenant bargaining power, and jurisdiction. In Texas, there are very few statutory regulations governing the landlord/tenant relationship, and most characteristics of that association will be defined by contract. There is no "standard" form of commercial lease and the provisions that can be included in the lease will be considered by the creativity of the parties and their counsel. As with any other contract, the tenant should Know What It Is Signing. The consequences of signing a "bad lease" can contain unforeseen expenses and enterprise failure.
The Elements of a commercial Lease - A Tenant's Perspective
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