Understanding The Terms of Your Commercial Lease

Don’t Let Confusing Lease Terms Prevent You From Renting a Commercial Property in Columbia, MO! Lindner Properties Has Your Back

You have a great idea for a business or service. You’ve got the capital to get it off the ground. You even found the perfect commercial property to rent. But now you have to read the lease, and commercial leases aren’t your typical contract. They can be hefty, with terms you may not be familiar with and clauses that can leave you scratching your head. Don’t let confusion about your commercial lease stop you from bringing your great ideas and services to the world! Instead, take the time to read this blog and learn exactly what those terms mean.

Lindner Properties has been managing commercial properties and overseeing commercial leases for decades, and we know exactly how to break down commercial leasing terms into easy-to-understand concepts. What are you waiting for? Start educating yourself and moving your business forward today!

Commercial Leasing Terms You Should Know Before Committing to Renting Commercial Real Estate in Columbia, MO

Additional Rent

Your base rent is the fee for occupying the usable square feet of a commercial property. Additional rent includes extras like common area maintenance, emergency maintenance, parking fees, taxes, insurance, and other charges. These additional costs should be clearly stated in your lease.

Agent

An agent serves as a go-between for a landlord and tenant during the negotiation of a commercial lease. This intermediary can be a real estate agent, broker, attorney, salesperson, or Certified Leasing Specialist.

Build-Out

Before you start using your commercially leased space, it needs to be suitable for your business operations. The build-out process often involves making changes to both the design and functionality of the space. 

Building Class

Commercial properties are categorized into different classes: Class A, Class B, or Class C. Although there's no fixed standard for each class, Class A buildings are typically newer or recently renovated with top-notch materials, amenities, and management. Class B buildings are often older and in less desirable areas, but they usually have good management, compensating for any physical or location-related drawbacks. On the other hand, Class C buildings are at the lower end of the property scale. They often need improvements, and their management may not be very helpful with small or big issues. Watch for the Building Class of your desired property before you sign a lease.

Commencement Date

The day a tenant starts using a property is called the commencement date. That's when tenants need to start paying rent and taking care of the property according to what's written in their lease agreement.

Condemnation

If a government agency takes control of a property from the landlord for public use, it's called condemnation. This could be due to a general condemnation or an eminent domain claim. Your lease should have a condemnation clause that explains what happens to you as a tenant if the property is condemned or taken back.

Covenants

In a commercial lease, a covenant is a commitment to do or avoid specific things in the rented space or agreement. These commitments can involve promises like paying rent on time using the method the landlord prefers, making sure the property is insured, allowing the landlord to check the property whenever, and ensuring tenants won't be bothersome to neighbors. The exact commitments will depend on your lease.

Extension

For tenants and landlords who like their business relationship, they can complete an extension. A lease extension is an agreement between both parties that outlines your rights and terms of continuing your lease beyond the initial agreements.

Grant of Lease

A lease will be granted and signed once you pay the security deposit, provide proof of insurance, or follow through with any additional requests from the landlord. 

Improvements

An improvement is any update made to the property that enhances the aesthetics or operations of the space. Your improvement terms will outline who can make upgrades to the property, who pays for the upgrades, and who will perform the work. If you want more or less control over the look and feel of your property, be sure to negotiate this clause to best suit your needs.

Indemnity by Tenant

This part in the agreement means the landlord is not responsible if someone gets hurt, something is lost, a claim is made, or there's damage on the property. But in cases of willful acts, omissions, or gross negligence on the part of the landlord, this clause might not apply.

Late Fee

If you're late paying rent, the landlord might charge you a late fee. This fee can be a fixed amount or a percentage of your rent, and the details should be set in your lease agreement.

Length of the Lease

Usually, commercial leases last for three or five years because landlords prefer longer agreements. Your lease will show when it starts and ends, and you can negotiate and decide on these dates before signing the lease.

Non-Competition Clause

This clause makes sure your landlord won't rent a nearby place to a business that competes with yours. For instance, if you are a family therapist, this will prevent your landlord from renting a space in the same office park or shopping center to the same type of service provider or business. Your lease will explain the details, like what kind of business is seen as a competitor and how far away they need to be from your rented commercial space.

Obligation for Repair

Sometimes maintenance or repairs are necessary, and this clause outlines who is responsible for performing the work. Depending on your lease, some repairs may fall on your shoulders, while larger repairs are the responsibility of the landlord. You should consult your lease to figure out who is in charge of what services at the property. 

Option to Purchase

You might get the chance to buy the place you're renting from the owner. Whether this happens during your lease or not depends on the agreement you’ve made. It's not a must-have for your lease, but if you want to buy the property later, it's a good idea to include this clause to set yourself up for success.

Permits

Both landlords and tenants need the right permits to lease and run a business properly. If you want to make changes or fix things at the rented commercial property, you, the landlord, or the contractor also need the necessary permits and licenses to make repairs or renovations.

Rent Abatement & Adjustment

If the property gets damaged in a fire or other natural disaster, this will specify how or if the rent will be changed or waived. 

Rent Amount or Base Rent

In commercial rentals, the rent is determined by the square footage of the space, not by the revenue generated. Additional rent may be added to this amount, as agreed upon in your lease.

Rent Increases

Rent often goes up each year because of inflation and changes in property values. This increase is usually a percentage of the total rent, but you can talk to your landlord to set a limit on how much it can go up. Before signing the lease, make sure to discuss and agree in writing on any potential rent increases with your landlord. 

Security Deposit

Your security deposit is a set amount of money used to reserve your commercial space before you sign the lease agreement. It protects your rights to rent the property while contract negotiations are still underway, preventing the landlord from leasing the space to anyone else in the meantime.

Taxes

If you're renting a commercial space, it's important to know how taxes work. This means understanding property taxes and real estate taxes, and figuring out who is responsible for paying them. Your lease should also have details about the contest of taxes, payment of ordinance assessments, and change in method of taxation. 

Usable Square Feet

Sometimes, tenants in different units might share spaces like hallways, parking lots, or common areas. But when it comes to paying for square footage, you should only be charged for the space you use to conduct business.