There are many unique considerations to take into account when negotiating a commercial lease agreement.
Every aspect of the lease needs to be meticulously crafted to deliver the best possible outcome for yourself, and the tenant. If clauses are missing from the final agreement, if they are ill-defined in any way, or if there are any unresolved issues associated with leasing the site, the landlord may be burdened with unexpected costs, or even legal problems, ruining their commercial investment. What must a landlord know when taking this first step?
Check the Business’ Credit Rating
It’s self-evident that if a tenant will have issues financing the rent, the relationship will turn sour before too long. It is, therefore, crucial to conduct a credit check of the prospective tenant. There are myriad factors that affect a business’s profitability. If a tenant has a positive credit rating, it provides significant reassurance that they will meet rent payments on time. Failure to do so will cause a default on the lease, leaving the landlord with an empty commercial building and a long vacancy period before new tenants can be found.
If there are any lingering concerns about the tenant, then consider a higher security deposit.
Use an Attorney
Commercial lease agreements are complex. Ideally, they should be drawn up by a qualified lawyer. This will provide certainty with rent, repairs, termination, use of the premises and other aspects. Despite the initial outlay, doing it by the book the first time will inevitably save money and protect your investment in the long run.
If you have chosen to draft the agreement yourself, then seek legal advice before it is finalised.
Be Honest
Honesty and trust are everything in a landlord-tenant relationship, as they are in any business partnership. Be up front with the tenant about the long-term plans for this property. If a shorter than normal lease period is being offered, then explain why. Make sure everything is transparent. Once trust is lost, it cannot be recovered.
Approvals
The lease agreement is not influenced solely by considerations of the landlord and tenant. Rather, it can also be affected by federal, state and local government laws and regulations. Some types of tenancies may require special council approval to operate, such as childcare, food preparation, chemical treatment facilities, or medical centres. Without these approvals, a tenant may not be able to move into the property and take up their lease, which could leave the landlord legally liable for lost business income. You may also be punished by the council for not obtaining the proper approvals.
As a landlord, you may lose months of time trying to source the proper paperwork and get it approved.
There is even the possibility that the application may be refused. Make sure that all the proper approvals are obtained before the lease is signed.
Maintenance and Restoration
Repair and maintenance responsibilities in a commercial building are typically divided between the tenant and the landlord. The structure of the building and major capital items such as windows, roofs, walls, drainage and the like are considered the landlords’ to preserve. Conversely, the interior of the building is typically the tenant’s responsibility to maintain. Nevertheless, within those broad classifications, some items may fall within either sphere.
As such, responsibilities for repair and maintenance should be clearly spelled out in the lease.
While necessary equipment like air-conditioners is provided by the landlord, it should be clearly noted in the lease that their daily maintenance is the responsibility of the tenant. This is unlike residential property, where a landlord is held responsible for their overall condition and maintenance.
Maintenance can generate high expenses, such as when refitting the premises, installing new systems, or dealing with unexpected problems such as the discovery of asbestos.
In many cases, tenants are allowed to make alterations to the property in response to business changes. These alterations could be minor in nature, or more significant. While this kind of flexibility is usual and necessary in the business world, a landlord could be left with a changed property, no longer suitable for the kind of tenant suited for the building. Inserting a specific, clear clause in the lease agreement which requires the tenant to return the property to its original state in such cases is critical insurance against this kind of impact.
In some instances – particularly with new or restored buildings – tenants may choose to fit out the property themselves, improving the property overall. If the landlord is leasing a retail shopping building or an office, it may work in their best interests to allow the tenant to vacate the premises at the end of the lease in its current state.
As you can see, it is crucial to ensure that a commercial lease arrangement starts off on the best possible footing. That’s why it makes best sense to enlist the serviced of an experienced and accomplished commercial property manager. MCO’s Portfolio Managers have helped hundreds of clients navigate the minefield to achieve mutually beneficial and profitable relationships. Call us today to see how we can help make your next commercial lease experience a positive one.