A commercial lease can be complicated. In addition to having your attorney review your agreement, below are six issues to keep in mind when signing a commercial lease.
1. Personal Guarantees
Signing a commercial lease in a personal capacity may expose a business owner to personal liability in the event of a breach or default under the terms of the lease. So, if a business owner shouldn’t sign a lease, then who should? It is ideal for business owners to create LLCs, corporations, or other business entities to sign agreements such as leases in order to protect their personal assets. Only “legal persons” can be parties to contracts and under Florida law LLCs and other business entities are recognized as “legal persons.” Even if it were to be the same individual who would have signed in their individual capacity now signing on behalf of the business entity, the party to the contract is now the entity, not the individual, and only the entity is exposed to liability.
2. Landlord and Tenant Responsibilities.
Under Florida law there are certain rights and responsibilities that are set forth by statute, such as the landlord’s responsibility to deliver possession of the property to the tenant on the date stated in the lease and the tenant’s right to quiet enjoyment of the property, meaning there will be no disturbance in the tenant’s possession of the property during the term of the lease. However, there are numerous other responsibilities that can be negotiated and included in the lease. Some of these responsibilities include what party is responsible for what repairs, payment of utility costs, and permissible uses of the property. Often, negotiating these terms up front can help avoid friction between landlord and tenant in the event that an issue arises at the property.
3. Lease Term
Unlike residential leases, it is not uncommon for commercial leases to have extended terms. Often, commercial leases may have terms of 10, 15, or 20 years. When negotiating a commercial lease, it is important for both parties to take the local market into account. If rent rates are at an all time high, it may not be ideal for a tenant to enter into a long-term lease at that time. Conversely, if a property is located in an emerging market a landlord may think twice about entering into a long-term contract at a low rate. For tenants, options to renew are a useful tool in providing long-term stability while also minimizing risk. An option to renew is an additional fixed term agreed upon by the parties that a tenant may remain on the property at the expiration of the initial term of the lease. At the end of the initial term, or any time before then, if a tenant wishes to stay on the property they can exercise their option to renew, if not the tenant simply chooses not to exercises their option and the lease expires at the end of the initial term. Options to renew are particularly useful because they allow a tenant to spend some time on the property before deciding whether they wish to remain there for an extended period.
4. Rent Rates & Increases
When negotiating commercial leases, tenants must be aware of what their rent rates include. In certain leases, such as triple net leases, tenants are not only paying base rent but also real estate taxes, insurance, and maintenance costs. In negotiating their rates tenants should be aware of what their rent covers and what costs if any they may be responsible for in addition to their rate. Many long-term commercial leases contain fixed escalations for annual increases in rent. While the maximum annual increase rate is capped by law, tenants should be aware that these figures are negotiable and should always try to negotiate better rates prior to signing a lease.
5. Notice Requirements
Florida law provides a baseline for notice requirements; however, parties may agree to their own notice terms in a lease. For example, parties may agree that signed writings delivered by email pdf satisfy notice requirements rather than requiring delivery of a hard copy letter. However, informal means of communication, such as a text message, generally will not suffice as proper notice. Lastly, the minimum time requirements for notice are strictly governed by statute and cannot be reduced.
6. Default Provisions
Perhaps the most important provision of any lease, default provisions offer parties an out in the event the other side has materially breached the terms of the lease. However, vague or unclear default provisions could lead to different interpretations of a lease and ultimately result in costly litigation. Clear and comprehensive default provisions offer both parties clearly defined terms of what constitutes a default under a lease and the remedies each party has for the other’s default. Clear and comprehensive default provisions can save parties time by serving as a deterrent for unnecessary, and sometimes frivolous litigation, that would otherwise require substantial investments of time and money.