Commercial Leases

There are many kinds of leases, including residential leases, ground leases, and the like, as well as some more specialized leases, such as agricultural leases involving multi year crops like Christmas trees or fruit orchards.

One of the most complex kinds of leases in Oregon is the commercial lease. These leases involve the rental of business premises.

Commercial leases generally address a very wide range of subjects, ranging from changes that can or must be made to the interior of a building; the kinds of signs that may or must be placed by the tenant, and where they must be placed; what will happen to counters, display cases, and other fixtures added by a tenant when the lease is over; and even what hours and days a tenant must keep the business open.

Business owners are often surprised (and unhappy) about provisions requiring them to operate a business during particular hours. Some leases even contain provisions requiring a business to be open 365 days per year. This can be difficult for some kinds of businesses, especially if they are labor intensive and family operated. As with many provisions, sometimes an accommodation can be negotiated. Other times, the reasonable business purpose of a landlord will require him or her to reject such an accommodation. For example, in a shopping center, both the landlord and the other tenants will have a legitimate interest in making sure all spaces are open for business at uniform times, so that there is a steady stream of customers for all tenants.

It can be important to read a lease carefully, and to work with a lawyer to make sure that you understand all portions. This can be quite expensive, but it can be a lot less expensive than finding out too late that you have agreed to a condition which is, for you, a deal breaker.

Misunderstandings can be expensive and troubling for both landlords and tenants. Some leases have options for the extension of a lease which the tenant can exercise even if the landlord decides that he or she would prefer to end the lease, or would like to renegotiate the conditions of the lease. A standard 5 year lease with three extension options can, therefore, be binding on the landlord for a full 20 years. It is important to clearly understand the implications of each clause or element of a lease, for this reason.

It can also be important to periodically review a lease, to make sure that both you and the other side are in compliance with the lease. For example, many commercial leases include automatic rent increase provisions. Sometimes research is necessary to determine the effect of such clauses, if, for example, the rent increase is tied to an inflation index. If both a landlord and a tenant fail to notice that the rent required by the lease has increased, but no increase in rent is actually paid, the difference can amount to a very considerable sum of money over a period of years. Even a modest inflation factor of 3% per year can make a total difference of over $5,600 on base rent of $1,000 per month over a period of five years.

In some cases, if a person does not abide by a lease, there will be grounds for an immediate remedy, including, in some cases, termination of the lease. In other cases, there will be a requirement to allow the person time to correct the problem. These issues can be complex, and failing to proceed appropriately can result in significant legal problems or unintended consequences.

Some leases also call for a tenant to pay a portion of his or her profit or gross receipts as additional rent. Such clauses can also give rise to the need for the landlord to be able to examine the books and accounts of the tenant, and/or for the tenant to provide audited statements to the landlord.

The obligations for repair and maintenance may also be split between the landlord and the tenant in a variety of ways. Sometimes there is a requirement that the tenant perform all interior maintenance, such as painting and maintaining plumbing. Other times this may be the responsibility of the landlord. Sometimes a landlord will take care of all exterior matters. Other times a tenant may be required to contribute to a fund for maintenance of the building and even the grounds. If there are unexpected maintenance needs, or a parking lot needs to be resurfaced, or the like, this can be a significant and unexpected expense for the tenant if the tenant has not carefully read his or her lease, and considered this possibility.

Some leases are known as triple net leases. In these leases, the tenant must pay all expenses, including the mortgage payments that the landlord must pay on the premises, insurance, repairs, taxes, utilities, and the like, and must still pay the full agreed rent to the landlord. In other leases a landlord takes the responsibility for some or all such matters.

Commercial leases will also usually specify whether (or under what circumstances) a tenant may assign or sublet a part of the premises, or a part of lease (i.e. the whole of the premises for the remainder of the lease).

In short, commercial leases are complex documents. They are often 20 to 30 pages long (with fine print and legal sized pages). Many commercial leases have grown and been amended over the years to the point where there are internal contradictions within the lease. Others contain provisions that are irrelevant to a particular lease situation. It can be important for both landlords and tenants to work with a skilled attorney to make sure that they fully understand all terms of a lease before signing, to negotiate any matters which emerge in this review, and sometimes to take other steps, such as incorporating, forming a limited liability corporation (LLC), ensuring that proper and sufficient insurance is in place, and the like. Failure to take proper steps may result in future problems which can be very expensive to fix, if they can be fixed at all. Failure to properly plan and understand matters of this sort can also result in considerable liability for one or both parties, which could usually have been avoided with proper preparation.

NOTE: The above touches on only some of the issues about which one should be aware when dealing with a commercial lease. There are many other issues which may be of significance, and which may make a considerable difference in a given case. If any of these situations apply in your case, you may benefit from legal advice from a lawyer who is well versed in real estate issues. The above should not be considered legal advice, nor should it be taken as a statement of the only time that one might benefit from consulting a legal or other professional.

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