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A lease is a legal document and it can be overwhelming to read through all of the legalese. But these terms and clauses are essential to both understand and properly interpret. Different leases will have different clauses but this is a selection of common ones to be aware of:
What amount is due to the lessor from the lessee and how often will it be paid. Not all leases are monthly. In some instances, they could be annually or quarterly. In certain areas, specifically when there is a season (e.g. beach town or ski resort), the tenant may only be required to pay rent when open.
The lessee may have an increased amount from the initial lease term. That increase could be negotiated to be a set amount on a regular basis (annually) or it may be increased by inflation (CPI). In some instances, the lessor may want an amount that is indexed to inflation but there is a minimum amount (e.g. “CPI or 3%, whichever is greater”).
The lessor may require that the lessee pay by ACH or by check. In some instances, if the lessee has had checks returned for lack of funds, the lessor may insist that payment is by cashier’s check or money order. The lease may also state specifically how the payment amount is allocated against the tenant charges (e.g. delinquent rent, then late fees, then current rent, then CAM and expense recoveries).
Dates are an important part of a lease. The lease duration may be stated in months or years. Important dates include the date the lease was executed, when the rent commences, when the tenant occupies the space and when the lease expires.
The lessor may require the lessee to secure the premises with an amount that will be held by the lessor for a designated period. The security deposit may be in the form of cash (check), bond or letter of credit.
All parties to the lease need to be named. The lessor as landlord, the lessee is the tenant. Other names that may be on the lease include the tenant’s trade name (“DBA”) and the property manager or other agent of the lessor. If the lessee is a corporate entity the name of the authorized corporate agent and a guarantor may also be named.
This is the physical address and should be described by a unit or suite number as well as the approximate square footage being rented.
If the rent and/or additional rent payments are received by the lessor after they are due, the lessor reserves the right to charge a penalty. This amount may be based on a percentage of all or part of the amounts that are delinquent. It can also be a fixed amount or a combination of a percentage and fixed amounts.
The lessor may be very particular about the type of tenants who operate on the property and will specifically state in the lease what the type of business is operating in the space. This is particularly important in retail, as tenant mix can impact the surrounding businesses. Additionally, certain types of business may run afoul of local zoning ordinances and impact the space and the property.
An important clause in both retail and office assets as it impacts other tenants and operations. In buildings where there is a central plant running mechanical systems and there is a security detail, a lessee operating outside normal business hours may impact operations. As an example, an accounting firm that plans on working on weekends during tax season will expect that the air handling system will be working during those days. In retail, it is important that all tenants are open at the same time to maximize sales opportunities for all tenants.
An amount beyond the minimum rental amount. It may include expense recoveries for CAM such as utilities, and special fees and charges that have been mutually agreed upon by the parties.
An assignment is the ability to transfer the rights and obligations of a leasehold interest to another party. A sublease is when a current lessee maintains their obligation in the lease but effectively becomes a lessor and leases their space to another party. In certain instances, a lessee may need to close or move their business but is legally bound to the agreement. Having the ability to sell the business and assign the lease is an important clause for the transfer of ownership. When a company needs to close an office or a store, and they cannot terminate their lease, they may wish to rent their space to another party in order to mitigate their losses.
Abandonment is the voluntary surrender of the property without a successor. The property will then revert back to the lessor. Reversion does not relieve the contractual obligation of the lessee. Default is when the lessee fails to fulfill their obligations under the agreement. This concept is important because it gives the lessor the ability to gain access to the premises. For retail properties, this is particularly important because occupied units have a direct impact on traffic and a unit that appears vacant can have a negative effect on other tenants.
Lessors require insurance for protection of both the lessor and lessee. Common insurance includes liability and property protection. Other types include business interruption and loss of use. The lease will specify both a minimum amount of the insurance and that the lessor be named as an additional insured.
This is an assumption of risk whereby the lessee will agree to reimburse the lessor, or pay directly for any claims, suits, liability or expenses related to a liability that may occur on the property.
An agreement negotiated between lessor and lessee that is included in the lease for some benefit for the lessee at a future time. Options can be to purchase the property, to take additional space, to terminate the lease early, to move from unit to another or to extend the lease at the end of the current lease period for a predetermined amount.
Changes or extensions to the current lease. Because a lease is a legally binding contract, the only way to make a change to the agreement is to create an addendum.
