Articles

Not All Commercial Leases Are Created Equal (Different Uses Require Addressing Different Issues)

Author: Date: 06/03/2021

Categories: Commercial Leasing

Agent handing over keys to empty commercial building representing a commercial lease. If you are looking to rent space in a building or property for your business, you should start by looking for the appropriate location for your specific use.  The business use category will also affect the language and conditions of the lease and certain requirements for approval of the use.  A restaurant or retail lease will certainly address different issues than would be included within an office lease or medical lease and different regulatory issues than industrial, manufacturing or other types of leases.  All commercial leases should have a general framework that is similar, to include such provisions as: (i) defining the premises to be leased, (ii) the length of the lease term, (iii) renewal options, (iv) apportioning responsibility between the parties for repair and maintenance and who pays the costs for the same, (v) assignment and sublease rights, (vi) insurance requirements, (vii) default provisions and remedies available to the landlord, and (viii) other standard lease clauses.  However, as uses change between lease types, more specific language may be included to address such differences.  The following are some lease issues to consider for the types of commercial lease scenarios, although some issues will overlap between the different uses and leases.

General Office Leases The landlord will usually maintain the building and surrounding grounds, and pass the costs of such maintenance on to all tenants as operating expenses in the relative percentages of each tenants’ space to the square footage of the entire building.  Office leases will usually include provisions regarding what is the appropriate percentage of the building that is part of the core factor outside of each of the tenants’ space, and therefore pass that additional percentage of cost on to tenants of the building.  The parties should discuss and negotiate what are appropriate costs for the landlord to include in operating expenses passed on to the tenants, and what costs incurred by the landlord are to be excluded from operating costs.  Landlord and tenants should also consider how and when these costs are paid to the landlord, and if the tenants are to have rights to review and audit landlord’s books and records if they have questions about how the landlord arrived at the dollar figures in operating expense reports.

Medical Leases Medical leases can involve specific equipment and buildout issues.  Medical practices may have a need to include such equipment as x-ray machines and in doing so, will need to work with the landlord to ensure that regulations are being met related to such machines, and that the construction of the premises properly addresses those requirements.  Depending upon the type of building and make-up of the tenants throughout the building, a tenant may want to request that their particular medical practice be provided with a right to an exclusive use within the building, to minimize other similar tenants from competing with them.  Medical leases should also address how tenants collect and dispose of medical waste from the premises.  

Restaurant Lease In a restaurant lease, you may also have different types of build-out issues, to address kitchen equipment, including grease traps.  Square footage and the number of proposed seats for the restaurant could affect parking ratios for any parking lots provided with the property.  If the restaurant intends to serve beer, wine, and alcohol, then provisions should be included in the lease for approval of the permits by the local authorities to serve and sell the same.  If approval cannot be obtained within a certain period of time, the tenant may want to consider language allowing them to terminate the lease if serving beer, wine and/or alcohol would be an integral part of their business plans.  The landlord may want to add a certain period of time after the tenant is unable to obtain the permit, to assist in getting the same done before allowing the tenant out of the lease.  Similar to medical leases, a restaurant tenant may want to request an exclusive use clause so that there are not restaurants selling similar menu items and therefore directly competing with customers within the same shopping center.  Restaurant leases may also often include percentage rent requirements, where in addition to base rent paid monthly, a tenant pays to the landlord additional payments based upon the percentage of gross sales dollars they receive over and above a certain threshold sales amount established and agreed upon by the parties (with certain items excluded from the definition of gross sales).  Often the base rent will be slightly lower in these instances, and then the theory is that the landlord and tenant both benefit if the tenant is more successful than the threshold amount, with the landlord helping by providing an attractive shopping center to bring in customers. 

Retail Leases:  Retail leases may have similar issues to restaurant leases as noted above.  If the space is within a shopping center, then retail tenants will want to ensure that the landlord has a good mix of different retail stores to attract customers to the shopping center.  In addition, hours of operation of other retailers in the shopping center may also be an important issue to address, so that a tenant does not find themselves as the only open location either earlier and/or later in the day.

Warehouse and Manufacturing Leases Warehouse and manufacturing leases, may have restrictions on the manufacturing of products versus storage and distribution.  Zoning requirements and restrictions for the property could place limits on what is permitted.  Landlords and tenants should be clear as to requirements and regulations related to the very specific uses that are proposed for these types of leases.  Leases and local regulations may also place limits on traffic in and out of the property.  Therefore, if a tenant knows that, if their use will generate large amounts of traffic, they should be comfortable that they will be able to do what they need to do without being in violation of the law and the lease.  Environmental issues could also be important to consider based on the types of products being stored or manufactured.

Industrial Leases:   For industrial leases, depending upon the use, environmental concerns may have to be addressed.  Landlords will want protection from the tenant to ensure that the tenant remains fully responsible for any environmental violations that may occur as a result of the permitted use.  There are often very limited areas where industrial uses may be permitted, so it is important that tenants evaluate the zoning requirements and restrictions to determine if their intended use will be permitted.  

Communication Tower and Solar Leases Communication tower leases and solar collection panel leases should address government approval for the tower or solar panels to be placed where the tenant wants to locate them, as not every property can have a communication or cell tower or solar panels.  Government regulations can limit how these uses are operated.  Also, landlords and tenants may want to consider if approvals will require public hearings, as these types of uses can bring neighborhood opposition depending upon where the intended use will be located.

Ground Leases Ground leases are a special type of lease addressing the use and development of the property by the tenant for usually a more moderate rent, in exchange for a longer-term lease.  The lease allows the tenant to use the entire property for 25, 50 or as much as 99 years, and the tenant will have the right to develop the property for its intended use, including the construction of a building or buildings.  The landlord simply collects the moderate rent and customarily has no responsibilities for any maintenance or operation of the property.

Whether you are a landlord or a tenant, making certain both you and your attorney know the varying issues that may affect leases and your ability to operate your business are important to consider going into your lease negotiation.

Please contact Michael Faerber at 301-251-1180 or mfaerber@mcmillanmetro.com if you would like to discuss commercial leasing, real estate issues, and business consultation.