If you are a landlord in Tampa, it is crucial to understand the legal and financial implications of any commercial lease you enter into before executing the lease agreement. Given that a commercial lease typically involves a long-term commitment on your part, it is in your best interest to consider several factors before finalizing the lease to minimize your risks and maximize your profits.
Selecting the Right Tenants and Conducting Due Diligence
When entering into a commercial lease, selecting the right tenant is critical. You want a reputable tenant that is financially stable to decrease the likelihood of problems or disputes. Conducting due diligence on a prospective commercial tenant (and guarantor) may include:
- Reviewing Financial Statements: You may want to ask a prospective tenant to submit relevant financial statements and documents such as a business plan, tax returns, or profit and loss statement for your review.
- Contacting References: If the prospective tenant has leased commercial property before, getting a reference from the previous landlord can be beneficial.
- Conducting a Credit Check: As a landlord, you (understandably) want to ensure that your tenant has the financial stability and ability needed to fulfill their obligations under the lease agreement. Conducting a credit check can be helpful in this regard; however, any time to are requesting information on credit worthiness or background affecting character, you need to be aware of the requirements under the Fair Credit Reporting Act (“FCRA”), including the need to obtain the prospective tenant’s authorization and the use of an approved “Consumer Reporting Agency” (“CRA”).
An early termination clause should be considered for riskier tenants.
Agreement on Rent
Your commercial lease agreement must include a monthly payment that aligns with market conditions while also ensuring that you make a profit after all costs are covered, including mortgage payments, taxes, insurance, and maintenance expenses. You will also need to decide what type of commercial lease structure to enter into with the tenant. Popular commercial lease types include:
- Gross Lease: In a gross lease, the tenant pays a fixed amount each month that covers all property operating expenses, typically including property taxes, utilities, insurance, and maintenance. The landlord, therefore, is responsible for these expenses throughout the duration of the lease. Consequently, when entering into a commercial gross lease, it is important to set a monthly lease payment that will provide sufficient revenue to cover those expenses and still make a profit. A gross lease agreement may include an escalation clause to provide some degree of flexibility in the monthly rent amount in the event there is a significant increase in expenses, usually insurance or taxes. A gross lease may also provide for a temporary increase if there is a noticeable increase in variable expenses, such as utilities.
- Net Lease: Another popular type of commercial lease is a net lease, which can be a single, double, or triple net lease. In a triple net lease, the tenant pays a portion of the property taxes, insurance, and CAM in addition to the base rent.
- Percentage Lease or Rent: A percentage lease agreement requires the tenant to pay a fixed monthly rental amount plus a percentage of the profits of the business each month. Usually, the additional percentage payments are only required if the tenant’s business reaches an agreed upon revenue point. For example, a tenant might pay a fixed monthly rent of $10,000 per month and an additional two percent of all net profits that exceed $100,000 per month. From a landlord’s perspective, this type of lease agreement can be risky but also offers the potential for maximum profitability if the business is successful.
- Variable Lease: As the name implies, a variable lease includes provisions that allow the terms of the lease to vary as conditions change. An index variable lease ties the tenant’s rent payments to an index, such as the Consumer Price Index, while a graduated variable lease increases or decreases the rent amount using an agreed upon schedule, such as a scheduled five percent yearly increase or a ten percent seasonal increase/decrease for a business based on tourism.
Lease Terms and Renewal Options
The duration of a commercial lease is often five years or more, making it crucial to carefully consider the terms of the lease before signing it. Entering in a longer lease guarantees a tenant for a lengthy period, which can be advantageous if the market is less than favorable; however, a shorter lease term offers the ability to revise terms to your advantage if the market warrants doing so. You will also want to address renewal options and rent increases in your original lease. It is common for a long-term commercial lease to incorporate periodic rent increases in a fixed amount or based on a formula related to the Consumer Price Index.
Maintenance and Repairs
To reduce the likelihood of costly disputes down the road, it is vital to address which party will be responsible for property maintenance and repairs in your commercial lease agreement. Typically, a landlord is responsible for maintenance and repairs to structure, such as the roof and foundation, while the tenant may be responsible for interior maintenance and repairs.
Restrictions and Use of Property
To protect your investment in the property and assure compliance with applicable laws, you will need to address the tenant’s use of the property and note any specific restrictions in the lease agreement. Commercial landlords often include “permitted uses” within the lease agreement, making it clear what type of business the tenant is allowed to operate. A tenant may want an “exclusive use” clause that prevents competitors from operating a similar business nearby. Consider a clause addressing what alterations the tenant is allowed to make as well as prohibited alterations as well.
Default Provisions
To protect your financial and legal exposure, your commercial lease agreement should have a section that clearly sets out what constitutes a breach of the agreement and what remedies are available to you in the event of a default. For example, failure to pay the rent, unauthorized use of the property, or other non-monetary violations of the lease may constitute a default on a commercial lease. Your commercial lease agreement should address procedures in the event of a default, such as the penalties for late rental payments.
Consult the Tampa Bay Commercial Lease Attorneys at Lieser Skaff
If you have a question regarding the matters a landlord should focus on when entering into a commercial lease, contact the commercial real estate attorneys at Lieser Skaff in Tampa at 813-280-1256 or request a consultation online.