The Importance of Leases for Commercial Property Management
Leases are the basis of every good commercial property management relationship with tenants. This is your opportunity to address every possible aspect of the agreement upfront. Ambiguity can lead to disputes, and this makes for unhappy tenants.
A lease aims to explain every possible scenario. This helps everyone know exactly who is responsible for what, and how to navigate any situations that might arise.
Let’s look a little deeper into what is outlined in a lease as well as the different types of commercial property leases.
What’s Outlined in the Lease
Commercial property management has to keep a lot of factors in mind when putting together a lease. There are a lot of considerations that will drastically affect the efficacy of your lease. These documents can have wide-ranging ramifications and should be very detailed.
Each situation is going to be different so be sure to include anything that applies specifically to your property. You want to try to prepare for any possible point of contention. Your lease will act as an immediate means of resolution or guiding document should your relationship with your tenant hit a grey area.
Here are some of the main aspects of a commercial property lease that should be addressed:
Length of Lease: This is also referred to as the lease term. It outlines how long the lease will be active, how long the tenant is required to cover the rent, and the available options for renewing the lease at the end of the term.
Rent: This is the amount of money the tenant is required to pay in order to continue using the commercial space. This will also stipulate any circumstances that could cause the fee to increase (such as passage of time).
Insurance Responsibilities: Is insurance included in the rent? Who is responsible for these outside fees?
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Security Deposit and Conditions for Return: A security deposit is a means of encouraging the tenant to take good care of the property. The lease will outline the amount of money to be used as this deposit upon signing and what conditions need to be met for it to be returned.
Rules for Signage: Where can the tenant put the sign for their business? How big can it be? And where should it be installed?
Inclusion of Fixtures or Build-Outs: Commercial property management will occasionally include services such as extra build-outs and fixtures. This section of the lease will outline any possible inclusions.
Maintenance and Repair Responsibilities: Included machinery such as an HVAC unit will need to be serviced and repaired over time. This outlines if the tenant will cover these costs or if the commercial property management will take care of it.
Notice Requirements for Termination: Some leases terminate on the expiration date and others require the tenant to submit a formal notice a certain amount of time before the end of the lease. This section outlines the appropriate manner in which to end the lease. This will also outline the requirements for what to do if the tenant wants to end the lease before the term is complete.
Sublease Rules: Is the tenant allowed to sublease the space to another tenant? This section will outline these capabilities.
Dispute Mediation Terms: Disputes will occasionally arise regarding issues that aren’t addressed in the lease. This section will describe the process of resolving these disputes — this could be done in arbitration or settled in court.
Types of Leases
This is also occasionally referred to as a full-service lease. A gross lease includes all aspects of operating costs into the price of rent. This includes the property taxes, maintenance costs, utilities, and so on. The rent for these types of leases are generally higher than other forms of a lease.
This lease is more adjustable than a gross lease. There is a base rent which is then modified by certain fixed operating expenses. This could include maintenance costs for common areas, insurance, and property taxes. There are four variations of a net lease:
- Single Net Lease: Tenant pays rent plus a share of the property tax, and utilities. Property management pays building expenses.
- Double Net Lease: Tenant pays rent plus a share of the property tax, property insurance, and utilities. Property management pays building expenses.
- Triple Net Lease: Tenant pays rent plus a share of the property tax, property insurance, maintenance of common areas, and utilities. This is one of the most common forms of commercial property leases.
- Absolute Triple Net Lease: The tenant is responsible for all building costs. This is essentially the same as owning the building, but without actually owning it.
Modified Gross/Net Lease
This is essentially a compromise between a gross lease and a net lease. It offers more opportunities for negotiation between commercial property management and the tenant. The base rent will depend on which factors will be paid by which party. This number remains fixed despite any increase or decrease in the costs.