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Drew Anderson
Updated: June 23, 2021
How To
How to choose the best commercial lease for your business
By Drew Anderson
Even in the best of times, commercial leases can be challenging to navigate. In the wake of COVID-19, most business owners are reconsidering a number of factors as they work their way back to something that resembles business as usual. For many, this might include taking a closer look at the best way to move forward with existing or future commercial leases.
There are several steps that business owners can take in preparing to negotiate commercial leases that will help avoid costly mistakes down the line.
1. Know how commercial leases differ before making your decision
Commercial tenants should have a general understanding of the types of leases they might encounter when considering a new space for their business. Specifically, they should know the difference between the following:
- A gross lease is one in which the tenant pays a base rent amount and the landlord is responsible for paying for all building related expenses (such as taxes, insurance and general maintenance).
- A triple net lease is requires the tenant to pay base rent and also reimburse the landlord for a proportionate share of all of the landlord’s building operating expenses.
- A modified gross lease falls in the middle. This type of lease includes a base rent amount, but the tenant also pays the landlord its proportionate share of the increase in the building’s operating expenses over a base year (generally the first year of the lease).
2. Ask a landlord about additional expenses
If you’re in a situation where you’re considering a triple net or modified gross lease, you’ll want to have a clear understanding from your landlord of how to prepare for expenses above and beyond the base rent you agree to. Ask about anticipated expenses for maintenance.
3. Be sure your new lease agreement includes a force majeure clause
There will be ramifications from COVID-19 for years to come, and many people will be more aware than ever before of the necessity of force majeure clauses in business documents. Essentially, this clause excuses either party from their contractual obligations in the event of circumstances beyond their control such as acts of god, epidemics, or other events that would significantly impact the ability to operate business as usual. Typically, these clauses excuse performance of one kind or another, and are most often associated with landlord or tenant fit-up obligations. But these clauses could also cover rent payment obligations if drafted properly. Landlords will be hesitant to simply include in the lease a provision that allows a tenant to avoid paying rent in the event of another pandemic or similar occurrence. This may become the subject of negotiation, with a likely outcome being an agreement allowing rent deferral under certain force majeure situations.
4. Expanded insurance coverages may be available
As many business owners have painfully discovered, their existing business interruption insurance coverages did not cover closures resulting from the pandemic. There will likely be changes in the insurance industry in this regard, and business owners need to discuss with their insurer the availability of expanded business interruption coverages that would provide some protection if a similar situation were to occur in the future. Have these discussions prior to entering into a lease so you better understand the potential risks. A well drafted lease will provide comfort and a level of protection to a commercial tenant.
Drew Anderson is a partner at Murray Plumb & Murray and chair of the firm’s real estate, finance and real estate succession planning group. He can be reached at danderson@mpmlaw.com.
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