Don't Sign Your Lease Without Knowing These Terms
Are you ready to take your business to the next level and rent your first office space? On this article of the Commercial Edge Blog, we're breaking down the 12 most important terms that you need to know before signing your lease. From understanding the difference between gross and net rent to learning about the rights and responsibilities of both the landlord and tenant, we've got you covered. Don't miss out on this essential information that will ensure you're making an informed and confident decision for your business.
1) Triple net lease, also known as a "net-net-net" or "NNN" lease, is a type of commercial lease agreement in which the tenant is responsible for paying all of the operating expenses associated with the property.
2) Basic rent, also known as net rent, is the foundation of any lease agreement. It is the amount that the tenant pays each month for the use of the space. This is typically the largest expense for a tenant, and it is important to carefully consider the base rent when negotiating a lease.
3) Common area and maintenance (CAM) also known as Additional Rent are additional expenses that may be incurred on top of the Basic rent. These can include things like property taxes, insurance, utilities, maintenance, and repairs. CAM costs are typically based on a tenant's proportionate share of a building, and are calculated by dividing the tenant's square footage by the total square footage of the building.
4) Gross rent is a type of lease in which the tenant pays a single amount to the landlord that covers base rent and all incidental expenses. This type of lease can be attractive to landlords because it provides a predictable stream of income and reduces the amount of time and effort spent on managing the property. It can also be appealing to tenants because they know exactly what they will be paying each month and don't have to worry about unexpected expenses. However, because the landlord is responsible for paying all expenses, the rent may be higher than it would be under a different lease arrangement.
5) Tenant improvement allowance is a sum of money that a landlord provides to a tenant to make improvements to a commercial property. These improvements can range from installing new floors or walls to upgrading fixtures and appliances. The goal of a tenant improvement allowance is to help the tenant customize the space to meet their specific needs and make it more functional and appealing.
6) Tenant inducements, also known as "TI's," are incentives or perks offered by a landlord to encourage a tenant to rent a space. These can include things like several months of rent-free or help with paying for leasehold improvements.
7) Percentage rent is a type of commercial lease agreement in which the tenant pays a base rent plus a percentage of their sales to the landlord. This type of lease is commonly used for properties such as shopping centers or malls, where the success of the tenant's business can have a direct impact on the value of the property. Under a percentage rent lease, the landlord and tenant will agree on a base rent amount that the tenant will pay each month. In addition to the base rent, the tenant will also agree to pay the landlord a percentage of their sales above a certain threshold, known as the "breakpoint." The breakpoint is the minimum level of sales that the tenant must reach before they are required to pay the percentage rent.
For example, a tenant may agree to pay a base rent of $5,000 per month and a percentage rent of 5% of their sales above $50,000. If the tenant's sales for a given month are $60,000, they would be required to pay an additional $500 in percentage rent, for a total rent of $5,500. Percentage rent leases can be beneficial for both parties, as landlords are able to share in the success of the tenant's business, and tenants may be able to negotiate lower base rent in exchange for paying a percentage of their sales.
8) A sublease is a lease agreement in which one tenant rents out a property that they are already leasing from a landlord to another tenant. The original tenant, known as the "sublessor," is responsible to the landlord for the terms of the original lease agreement. The new tenant, known as the "sublessee," is responsible to the sublessor for the terms of the sublease agreement.
Subleasing can be useful in a variety of situations. For example, if the original tenant needs to temporarily vacate the property for a business interruption or relocation, they may choose to sublease the space in order to recoup some of the costs of the lease. Alternatively, the original tenant may have extra space in the property that they are not using and decide to generate some additional income by renting it out.
9) A subordination clause is a provision in a lease agreement that requires the tenant's interest in the property to be subordinated to the interests of another party, typically a lender. This means that if the landlord defaults on a loan or mortgage, the lender has the right to foreclose on the property and take ownership, even if the tenant is still occupying the space. These clauses are often included in leases when the landlord has taken out a loan or mortgage to purchase or improve the property, and the lender requires the tenant to agree to the clause as a condition of the loan.
While subordination clauses are a common feature of many commercial leases, they can be risky for tenants as they may be forced to vacate the property if the landlord defaults on the loan. It is important for tenants to carefully consider the terms of the clause and any potential risks before agreeing to it.
10) An indemnification clause is a provision in a contract that requires one party to protect another party from losses or damages. In the context of a commercial lease, an indemnification clause may require the tenant to indemnify the landlord for any losses or damages that the landlord incurs as a result of the tenant's actions or inactions. These clauses are often included in commercial leases to protect the landlord from potential liability. For example, if the tenant causes damage to the property or causes injuries to third parties on the property, the indemnification clause may require the tenant to pay for any resulting losses or damages.
11) An assignment clause is a provision in a lease agreement that allows the tenant to transfer their rights and obligations under the lease to another party. This process is known as an "assignment." There are two types of assignments: a voluntary assignment, in which the tenant initiates the transfer, and an involuntary assignment, in which the landlord initiates the transfer. In either case, the assignment clause typically requires the tenant to obtain the written consent of the landlord before proceeding with the assignment.
12) A renewal clause is a provision in a lease agreement that allows the tenant to extend the term of the lease beyond the original expiration date. This process is known as a "renewal." There are two types of renewals: a voluntary renewal, in which the tenant initiates the extension, and an automatic renewal, in which the lease is automatically extended unless the tenant gives notice of their intention not to renew. In either case, the renewal clause typically requires the tenant to give the landlord notice of their intention to renew within a certain timeframe, and it may also outline any changes to the terms of the lease that will take effect upon renewal.
If you're feeling overwhelmed you don't have to go at it alone! A commercial real estate agent is here to help guide you through the process and provide you with expert advice and knowledge. We'll work with you to understand exactly what you're looking for, and we'll do our best to find the perfect space that meets all of your needs and budget. If you're in Vancouver, don't hesitate to reach out to us – we're here to make the process as smooth and stress-free as possible.
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