As a commercial property landlord, one of the best steps you can take to avoid legal issues is to create an airtight lease agreement. This agreement is the main document protecting your rights.
Commercial leases typically involve longer terms and larger financial commitments than residential ones, which makes them riskier for everyone involved. By building a legally solid agreement and checking in with a commercial real estate lawyer, you can avoid taking on additional risks.
The Essential Elements of a Commercial Lease
The Identities of the Parties
The first part of your commercial lease agreement should name each party to the lease — in other words, the landlord, tenant, and any guarantors. The legal name of your business tenant must be accurate and include any designators in their official name, such as LLC or Inc.
A Description of the Property
This section describes the rented space. It should include the street address, square footage, a description of common areas, parking spaces, and any other relevant details.
Use Clause
The use clause limits how the tenant can use the space they’re renting from you. For instance, you may prohibit using the space as a residence, using the space in a way that violates zoning ordinances, and illegal activity.
The Term of the Tenancy
The term clause states the length of the lease. It also lists the exact lease starting date, the first date the tenant must pay rent, and the ending date of the tenancy.
You may want to add a renewal clause. With a renewal clause, the lease will be automatically renewed at the end of each term as long as neither you nor the tenant give a written termination notice. You can have a set annual rent increase amount built into your lease or state how soon you will notify the tenant before raising the rent.
Rental Payments and the Security Deposit
Your lease should state the amount your tenant owes you each month and when it is due. If you have a multi-year agreement, you can provide for annual rent increases in this part of the lease, too.
The security deposit is the amount the tenant must give you upfront to offset potential damage or unpaid rental payments in the future. In Washington state, you cannot require a security deposit over the total of the first month and last month of base rent.
Many landlords require a personal guarantee in their lease agreements to ensure the rent is paid even if the tenant company collapses. However, Washington state has limits on requiring personal guarantees of more than the first two years of base rent payments plus the total costs of landlord-provided tenant improvements made to the leased space.
Possession Agreement
The possession agreement should include a description of any provided furnishings, including parking spaces. It should also specify limits on remodeling and/or the unit’s condition when the lease ends.
You may want to require the tenant to get all remodeling or improvements pre-approved by you. You can also require the tenant to restore the property to its original condition before they leave.
Property Insurance Agreement
The lease should specify whether you or the tenant is responsible for obtaining and paying for casualty insurance. When the tenant occupies only part of the building, the landlord typically insures the building while the tenant insures their belongings.
If the tenant occupies the whole building, you can require the tenant to maintain a certain level of insurance coverage for the building and name you, the landlord, as an “additional insured.”
Maintenance and Utility Duties
Your commercial lease should clearly state whether you or the tenant is responsible for each type of maintenance item. Commercial tenants are typically responsible for most maintenance items other than the roof, exterior, and structural components of the building.
Commercial leases should also state who is responsible for paying each utility. If your tenant is expected to pay for their own electricity and other utility bills, the lease should spell that out.
Late Payments Agreement
This part of the lease describes the additional late fee you are allowed to charge the tenant if they do not pay their rent on time. If you do not specify a late fee in the rental agreement, you will not be legally allowed to charge one.
Additional Terms
Many commercial leases come with non-compete clauses stating that you won’t rent another space in the same building to a tenant with a similar type of business. You can also have rules that prevent sublets without your prior written approval.
If you have a mortgage, your bank likely requires you to include a subordination of lease provision on your leases. This term states that the tenant’s right to enjoy possession of the property is lower than the rights of the bank holding a mortgage on the property.
You should also include boilerplate clauses, which are standard clauses at the end of the lease agreement that typically aren’t negotiated. These clauses often specify a preferred way to handle disputes (such as mediation or arbitration) and an amendment clause describing how changes can be made to the lease.
Signatures
Finally, don’t forget the signatures! Both you and the tenant must sign the lease. Without both signatures, the lease won’t be legally binding.
Need Help Drafting a Lease Agreement?
It’s always a good idea to have a lawyer look over your lease agreement before anyone signs it. They can help you find potentially unclear or risky language.
The Anderson Hunter Law Firm has helped many landlords and tenants in the Snohomish County area. We can help you draft a lease that reduces your chances of legal trouble. Our experienced commercial real estate attorneys can also represent you in court if needed.
Contact us today to schedule a consultation about your commercial lease agreement.