A commercial lease is a contract. Before leasing a commercial space, the landlord will generally provide a pre-prepared lease for potential tenants to review and sign. In most cases, the lease prepared by the landlord will maximize and protect the landlord's interests. But this does not mean that a commercial tenant cannot negotiate with the landlord and revise the lease to protect the interests of the tenant. Before signing a lease agreement, a commercial tenant needs to hire an attorney to review the lease agreement. Experienced attorneys can point out where the lease is unfair to the tenant, which provisions should be negotiated with the landlord, what should be amended, and how it should be amended to be beneficial and fair to the tenant. Here are some important points to consider before signing a commercial lease:

Length of lease

Once the business owner has decided on a rental location, the first question to consider is the length of the lease term. Commercial tenants should decide on the length of the lease term according to their own business conditions and prospects. Generally, for small companies, the initial lease term could be set at three to five years, and then two additional five-year renewal options can be signed. The initial lease term for medium and large enterprises can be set at five to ten years, followed by two renewals of ten years each.

Rent increment

Rent is a very important consideration in a commercial lease agreement, and commercial tenants must do their homework, understand the typical rent in the area, and negotiate an acceptable fair lease price with the landlord. More importantly, business tenants should also negotiate a reasonable rent increment ratio, and if necessary, an upper limit to the increase rate can be added to prevent unlimited rent increases.

CAM expenses

With commercial leases, landlords generally require business tenants to be responsible for maintenance costs for the common area (Common Area Maintenance/CAM). This part of the lease is relatively complex. Tenants must read the lease agreement carefully to see what the CAM expenses are and analyze whether they are reasonable. If necessary, tenants can ask the landlord to provide records of the most recent CAM expenses to judge the level of CAM expenses. Tenants should also consider negotiating capping the CAM fee when signing the lease.

Personal guaranties

Generally speaking, commercial landlords will require the tenant to find a guarantor to guarantee fulfillment of the lease and require the guarantor to sign an attachment listing the guarantor's responsibilities. For the tenant, the first thing to do is to negotiate with the landlord to see whether the guarantor requirement can be waived by paying an extra deposit. The landlord may compromise, but it is more common for the landlord to insist that a guarantor guarantee the performance of the entire lease. Therefore, the tenant should understand the legal responsibilities of the guarantor and the legal consequences of using personal assets as a guarantee when signing the guarantor document. The tenant must be clearly aware of the legal risks of the guarantor when signing the lease.

Subletting

Whether the tenant is allowed to sublet in a commercial lease is an issue that needs to be clarified, because there are certain risks and uncertainties in commercial operations. If the tenant encounters obstacles in the operation of their business and needs to end the lease early, and if the lease allows the lessee to sublet to other companies or individuals, this can greatly reduce losses. This is a clause that a commercial tenant should negotiate with the landlord and on which the tenant should not compromise.

Limitation of competition from similar merchants

If the business operated by the tenant is not very unique and there may be potential competitors, it is necessary to include clauses restricting the competition of other businesses in the lease to ensure the interests of the tenant. For example, a tenant operating an ice cream shop may require the landlord to specify in the lease a limit on the number of the same type of stores in the same shopping mall. In addition, the landlord can also be required to prevent the loss of customer traffic in the shopping mall. For example, an ice cream shop is next to a cinema. If the cinema moves out of the shopping mall, it will seriously affect the traffic flow and the business of the ice cream shop. Therefore, the tenant with the ice cream shop can negotiate with the landlord to stipulate that if the landlord cannot guarantee the flow of customers or if a major business leaves the shopping center, the landlord will be deemed to have violated the lease agreement, and the tenant has the right to terminate the lease.

Force majeure

Generally, commercial leases contain force majeure clauses, which allow the tenant to temporarily delay or waive the obligation to pay rent in the event of a specific force majeure. Situations of force majeure generally refer to wars, riots, earthquakes, hurricanes, lightning and explosions, etc., but also include energy interruptions, unexpected legislation and strikes. Negotiating commercial lease contracts in the wake of the Covid-19 pandemic requires negotiating with landlords to try to include unforeseen public health events such as the pandemic as a force majeure event.

Early termination

Generally, the landlord will not allow the tenant to end the lease early. Doing so is a breach of contract, and the tenant must bear the stipulated responsibility for breach of contract. When negotiating a commercial lease agreement with a landlord, the first thing to do is to understand the terms of lease termination and the corresponding default terms. Secondly, the tenant should negotiate with the landlord to stipulate conditions allowing early termination of the lease. For example, the lease could stipulate that whether the tenant has reached a certain level of business revenue for several consecutive years determines whether the lease can be terminated early, or that the tenant can pay multiple months' rent in exchange for early termination. In short, the tenant must carefully read the relevant details in the lease and negotiate the provisions on early termination with the landlord to avoid major losses caused by breach of contract.

The above is a general introduction, and should not be construed as individual legal advice. For specific legal questions, please contact the Law Offices of Yu & Associates. Tel: 301-838-8986, Fax: 202-595-1918; E-mail: syu@yulegal.com, Address: 110 N. Washington St., Suite 328E, Rockville, MD 20850. (All rights reserved.)