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commercial lease
­— the key to the future of your business
Types of commercial leases and how to negotiate them.
Table of contents
Introduction
Section 1: Questions & Answers ........................................................
4
Section 2: Leasing Terminology
A. Commercial Lease Types .............................................. 9
B. Common Terms and Clauses ........................................ 10
C. Rent .............................................................................. 11
D. Common Legal Terms .................................................. 12
Section 3: Default: Unlawful Detainer
A. Description of the Process ............................................ 14
B. Unlawful Detainer Procedure & Time Chart .................. 15
Section 4: Samples & Tools
A. Sample Lease Agreement ............................................. 16
B. Common Clauses in a Commercial Lease (Samples) .... 20
C. Sample Lease Addendum ............................................ 22
D. Sample Sublease .......................................................... 23
E. Negotiation Checklist ................................................... 24
F. Move In Checklist .......................................................... 25
Section 5: Additional Resources ........................................................ 27
Section 6: Alphabetical Index of Terms ............................................. 29
INTRODUCTION
Commercial Lease is intended to educate small business owners in San Francisco about
Commercial Leases. Whether you are looking to sign a Commercial
Lease for the first time, or looking to renegotiate an existing Lease, the
information will help you understand many aspects of a Commercial
Lease, the importance of a Commercial Lease to your business, and will
provide some tools and tips to guide you along the way. The goal is to
empower entrepreneurs who may not have the resources to hire a real
estate or legal professional to act on their behalf.
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In Section 1, we answer some of the most common questions when dealing with Commercial Leases. We recommend you read through this section first to familiarize yourself
with important issues that commonly arise.
In Section 2, we define many of the terms and clauses related to Commercial Leases. We
have organized these terms into different categories, but have also provided an alphabetical list at the end of the brochure.
Section 3 covers Defaults, which is when the lease has been broken and the Landlord
takes legal action.
Finally, in Section 4, we provide some samples and tools. These include a sample Lease
and common clauses in a Lease, a sample Lease Addendum and sample Sublease, and a
Lease negotiation and move in checklist.
Every Lease is different, and most of the terms that are important to small business owners can be negotiated. We hope you find this guide useful in making your business a success. However, the issues surrounding Commercial Leases can be complex, and we have
provided a section at the end where you may seek additional help.
A Tip on Terminology
Throughout this brochure the main parties to the commercial lease will be referred to as
“Landlord” and “Tenant”, instead of “Lessor” and “Lessee.” This should make the terms
and definitions easier to understand. However, in the actual Commercial Lease the parties
will likely be referred to as Lessor (Landlord) and Lessee (Tenant). Here’s a tip to remember this confusing language: The Owner/Landlord is the Lessor: Owner = LessOr (with an
“O” for Owner). The Tenant/Business owner, the person signing the lease, is the Lessee:
Me = Lessee (with an “E” just like me).
I. QUESTIONS & ANSWERS
?
Whether you are signing a Lease for the first time or renegotiating an existing Lease, there are
many things to consider. Below are answers to some of the most important questions related
to Commercial Lease Agreements.
3 What is a Commercial Lease?
A Commercial Lease is a written contract. Once signed, it
is a binding agreement which allows the tenant to occupy a
physical space for a specific period of time in exchange for
a rental fee.
3 Do I need a Lease?
Having a long-term Lease, such as for three years or more,
can be very important to the stability and longevity of your
business. For most small businesses, Rent is one of the
largest fixed monthly costs. By knowing what you are
paying each month over the long term, you are in a better
position to plan for your business. Most importantly, renting
a space from month-to-month leaves your business vulnerable to sudden eviction or rent increases.
Without a long-term Lease:
• You will not have the assurance that your business will
continue to operate year after year in the same location.
• Your business may have to relocate, which can be expensive and time consuming. This may cause a disruption to
your business, leading to the loss of your regular customers and impacting profits.
• You may not be able to secure financing for your business,
as lenders usually require you to have a lease for the
same term as that of your proposed loan.
3 Are my rights as a commercial Tenant in
San Francisco the same as my rights as
a residential Tenant?
No. There is no commercial rent control in California.
Unlike residential rent control laws, which protect Tenant’s
rights and limit the ability of a Landlord to raise rents and
evict Tenants, commercial Tenants have only the rights
which are specified in the Lease for the Term of the agreement.* There are also fewer consumer protection laws such
as security deposit limits, which means the Landlord can
charge whatever they want if the market allows. The idea
is that a Landlord will not charge more than what other
businesses in the same market are paying, but there are no
legal limitations. These are the reasons negotiating a Lease
that works for your business is so important.
* There are additional legal rights, which may be enforced with legal action.
3 Can I negotiate a lease?
Yes. If there is something you need, try to negotiate it.
Standard commercial lease agreements are written to benefit the Landlord, not the Tenant. Even though you may be
given a typed lease, you can still negotiate its terms before
signing it. Landlords are looking out for their interests, and
you should be looking out for the interests of your business.
Understanding all aspects of your lease, and being sure it
works for you, is essential to keeping your business strong
and profitable.
3 Are there any drawbacks to having
a lease?
If you sign a lease you are responsible for meeting your
obligations over its entire term, which is usually for at least
several years. This means you are responsible for paying
your monthly rent on time, even if your business is not
profitable. If you do not meet your obligations under a
signed lease, you could end up in court or damage your
personal credit.
3 How can I negotiate a favorable Lease
agreement?
This starts with proper business planning. If you have done
your homework, you will know what kind of space your
business requires, and what you can afford. It is important
to know these basics before you can negotiate a lease.
We have provided a Negotiation Checklist as an appendix,
but here are some important considerations when negotiating a lease:
• Know the market rate rent in the neighborhood. You can
do this by checking with other businesses nearby, contacting the local Merchant Associations, or asking about
the rents for other available commercial spaces in the
neighborhood.
• Make a list of all of the terms you must have, along with
those terms which you may want but could do without
(see the Negotiation Checklist).
• Be clear on additional costs, such as property taxes, repair
costs, and any possible fines such as Graffiti removal.
Find out how much these costs normally are. (For
example, for property taxes request a copy of last year’s
taxes.)
• Know your competition, such as how many similar businesses are operating within two blocks to four blocks
from your business.
• Verify the zoning requirements for the prospective location. Zoning requirements are rules and regulations
imposed by the City, which control the types of uses
allowed in a certain area. If the location is zoned for
retail, such as a grocery store, you cannot open a fullservice restaurant without a change in use permit. This
process can take a long time, be difficult, and expensive
to complete. If you are paying rent for a space that you
are unable to use, it can cause serious financial problems,
especially if you were relying on revenue from your business to pay the rent.
If you need special licenses and permits, or are requesting
financing to start your business, you may want to negotiate a Conditional Lease with the Landlord. A conditional
lease would require that the permits, repairs, or financing
be finalized before the lease is valid. Another alternative
is to include all of the terms and conditions in a Letter of
Intent, which would only lead to a Lease agreement if the
conditions are satisfied. (See Section 3, Common Terms
and Clauses.)
Most importantly, be confident and know that you have
something great to offer the landlord. Use your Business
Plan to complete the Negotiation Checklist. That way you’ll
be ready when you find that perfect location.
3 What should I pay in Rent?
The Rent should be based on several factors: the market
rate, your business budget, and the length and type of
lease you are signing. This is where doing your homework
and planning ahead is essential. Ask around, check with
surrounding businesses, and look at the prices of other
commercial spaces in the neighborhood. If your Rent
does not fall within the market rate or is not comparable
to other businesses in the neighborhood, there should be
a good reason for it. (Is it a newer building? Does it have
unique characteristics or amenities?) If you have done your
Business Plan, you will have a clear idea of how much your
business can afford. This is the most important factor in
determining what Rent you are willing to pay.
The Rent amount also depends on what type of lease you
have. If you have a Gross Lease, then all costs are included
in the Rent. This may result in a higher rate than a Net
Lease. On the other hand, a Net Lease may have a lower
Rent, but additional costs such as Property Tax can be
unpredictable and high, bringing your monthly rental costs
much higher than just the Rent. (See the Terminology
section for more information on the difference between a
Gross Lease and a Net Lease.)
3 Should I hire a broker?
It depends on your overall budget and how much time you
have to find a space. There are many different types of
brokers and they will all charge a fee. There are two important considerations when hiring a broker:
1. Who does the broker work for? Sometimes brokers work
for landlords, sometimes they work for both landlords and
prospective tenants, and sometimes they work exclusively
on behalf of tenants. You need to know who the broker
is representing to be sure they are looking after your
interests.
2. What is the fee? Brokers charges different rates, from
one time fees to a percentage of the overall lease. Make
sure you understand exactly what the broker will charge
you.
As real estate professionals, brokers can be helpful in
looking for a commercial space and negotiating a commercial lease. On the other hand, with proper planning and
research, there is no reason to think you can not do this for
yourself.
3 Are all Commercial Leases the same?
No. There are many types of Leases, the most common
being Gross Leases and Net Leases.
Gross Leases include all additional costs such as Maintenance and Property Taxes in the Rent. In a Gross Lease
the Tenant is only responsible for the Rent, not other larger
costs such as Property Tax.
Net Leases do not include all additional costs. Net Leases
5
require the tenant pay Rent plus additional costs such as
Maintenance. Double or Triple Net refers to the extent
which the tenant is responsible for the additional Net costs
such as Property Tax, Insurance, and Operating Costs. The
most common Net Costs are Property Tax and Insurance.
Operating Cost may include utilities, water, and maintenance cost.
Most Leases are a combination of several Lease types such
as a Gross Lease combined with a Step-up Lease. In this
case the Rent would include all costs, but the annual Rent
increase would be based on a pre-set amount such as
three percent (3%).
See the Terminology section for more information on the
different types of Leases.
3 What is the most common lease period?
It depends. Some neighborhoods still rely on long-term
Leases of ten, fifteen, or even twenty years or more. However, the growing trend is three to five years. Just like other
important factors in your lease, the Lease Term can be
negotiated. As always, do your homework and refer to your
Business Plan.
Some things to consider are:
• Market conditions may influence the Lease Term or your
business needs. If the market is good and rents are high,
you may want to lock into a longer Lease to protect you
from the Landlord raising rent or finding a new tenant
who is willing to pay more. If the market is not good or
in decline, you may want a short-term Lease to be able to
get a lower rent if the market continues to go down.
• You can also negotiate a flexible annual increase or even
an annual decrease. If your business is a start-up business, a shorter Lease may be more beneficial in case the
business is not successful. However, a short-term Lease
may leave a successful business without a location after
only a few years, and may make it more difficult to access much needed capital. Also, your business may lose
regular customers if it’s forced to move after establishing a
stable customer base.
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• In a tough economy or slow market, landlords and tenants
may want a shorter-term lease if there is fear that the
business may not succeed due to the bad market. On
the other hand some landlords and business owners may
benefit from a longer Lease to lock in an affordable rental
rate and have the stability of a long-term Tenant.
If you are unsure about which option is best for your business, you can negotiate an Early Termination Clause. This
allows the Tenant to terminate the Lease prior to the end of
the Term in exchange for a fee. Usually the fee is limited to
several months Rent and Landlord costs, but you want to
be sure the fee is reasonable. This option is only for early
termination of the Lease agreement. This does not give
you the right to transfer or sell the business.
Remember: do your homework and refer to your business
plan to be sure you are negotiating in the best interests of
your business.
3 If there is an Option to Renew, does this
mean that the Lease just continues for the
set period of time stated in the Option to
Renew?
Not necessarily. The most important thing to remember
is that you must negotiate the terms of the renewal in
advance. Simply having an option to renew for three or five
years leaves other terms of the renewal unresolved, which
can lead to disagreements. For instance, you will want to
be clear on when you need to inform the Landlord you
would like to exercise your Option to Renew. (This is often
many months before the original Lease ends.) Most importantly, you will want to have some indication of what the
rent will be if you choose to exercise your Option to Renew.
The Renewal Rent calculation may be based on market
rate, the Consumer Price Index (CPI), a set percentage, or
on the current Lease’s annual rent increase amount.
When it comes to Renewal, the strongest position for a Tenant to be in is to have an Automatic Renewal Option, which
allows for the Lease to automatically renew and keep going
for the number of years stated in the Automatic Renewal
clause. Depending on how it is written, an Automatic
Remember, if there is something that you want you should try to negotiate it.
Standard Commercial Lease Agreements are written to benefit the Landlord, not
the Tenant. Just because the Lease Agreement may already be in writing, does not
mean that you cannot negotiate the terms and conditions or make changes to the
proposed Commercial Lease Agreement before signing the final version.
Renewal may be cancelled by either the Landlord or the
Tenant giving notice in writing that they will be terminating
the Lease. An Automatic Renewal makes it easier to count
on the new Lease and a predictable rental rate.
3 What if there are changes to the Lease?
A contract should always be in writing and so should any
changes to that contract. If there is an amendment, include
an Addendum to the Lease (see sample Addendum). Both
parties need to sign it and it should be stapled to the original Lease. Always keep a copy of any signed contract.
3 Are there any other clauses which may
affect the amount of rent I pay?
Yes. The following are the most common additional costs
that may be included in a Lease. Some of these can be
negotiated with the Landlord and must be accounted for
when budgeting your overall costs. (See section 3 Common Terms and Clauses for more information.)
responsible for additional costs such as repainting, repairing, or paying for fines associated with damages such as
graffiti or vandalism. Be sure to state who is responsible for
damages to the exterior of the building, who will pay for any
repairs, and who will pay for ongoing building maintenance
(i.e. plumbing, electrical, etc.).
3 What are some important Lease clauses I
should try to negotiate?
Rent: It is always good to try to negotiate a fair and man-
ageable Rent amount. This is where the market information, asking around, and looking at other available spaces in
the neighborhood will prove helpful. If you have done your
homework, your Business Plan should tell you what you
can afford. It is always advisable to have at least a couple of
months of rent in the bank to give yourself some protection
in the event of an emergency.
Security Deposit: Since there is no Rent control for Com-
may charge if the Tenant stays in the premises after the
Lease Term expires. The Landlord may begin to charge you
this amount without any additional notice, or may use this
amount of rent in the calculation of rent owed in a legal
proceeding. This amount is typically between 150% and
200% of the normal monthly rent, which can add up very
quickly. This amount should be negotiated prior to signing
the Lease.
mercial Leases, and there are no Security Deposit limitations, you should try to negotiate a reasonable security
deposit. This usually means the Security Deposit does not
exceed two months rent. Also, there is no legal requirement to pay interest on a security deposit. (You can ask
that the Security Deposit be used in the case of any failure
to pay Rent. In this case, the Landlord may request that
the Security Deposit be paid back in a reasonable period of
time, such as 30 days. You can negotiate this repayment
period as well. This option may prevent the Landlord from
taking legal action against you if you get behind on the rent.
See the Default section for more information.)
Insurance coverage: Landlords usually require the Tenant
Late Payments: You may try to limit the fee on late pay-
Holdover Rent: This is the rental amount the Landlord
to carry between one million and two million dollars in
insurance. The premiums can be very costly and you should
try to shop around for an affordable rate from a respected
or well-known company. Also, you will most likely need
additional insurance for your business and your personal
property, which are not included in the coverage requested
by the Landlord. It is common for the landlord to request to
be included on your insurance policy or to require notification of any modification.
Property Taxes: If you are responsible for your share of
the Property Taxes, be sure to ask for a copy of the tax assessment from the prior year. This is not a guaranteed rate
for the current year’s costs, but it will give you an idea of
what to expect. These values go up and down every year,
so you will need to budget for this additional cost.
Fines or Building Maintenance Fees: The Landlord may
require that the Tenant maintain the exterior or outside portion of the premises. If this is the case, the Tenant may be
ments as well as the grace period, such as the third (3rd)
or the fifth (5th) of the month. Most Late Fees range from
3% and 10% of the total Rent. Be sure to note the due
date for Rent and when the Rent is officially considered late.
It is important to understand when your Rent is due or you
may end up in Default. It is also important to be sure you
keep proof that you paid your rent, such as copies of your
checks, and also proof the rent was received by your landlord, such as bank statements that show your rent check
has been processed by your landlord.
Lease Term: To be sure that the Lease Term is right for
your business, you may have to negotiate with the Landlord. For instance, if the Landlord is offering a three year
Lease, but your bank has requested a five year Lease in
order to process your request for financing, you can use this
information to negotiate a longer term Lease. Prepare information for the Landlord, which shows that you are serious
about the location and the Term. You may present your
business plan, the request from the bank, and any other
7
information which documents a successful track record for
your business. This information is helpful because Landlords do not want to get “stuck” in a long term Lease with
a business that may not be able to carry out the terms of
the Lease.
Renewal Term: Outlining the details, such as the Rent,
the Renewal Term (i.e. an additional five years, three years,
etc.) and any changes to the current Lease, will help the
Renewal process go smoother in the future. The Renewal
option is not a guaranteed Renewal. It is only a promise
to negotiate in good faith. The Landlord does not have to
automatically give you the Renewal. If possible, you may
want to negotiate an Automatic Renewal Term. An Automatic Renewal means the Lease would continue based on
the current terms and conditions until either the Tenant or
the Landlord gives notice to the other party, in writing, that
they will be terminating the lease. You may request an Automatic Renewal for a pre-set Term, such as five years, and
state in the Agreement that unless the Landlord submits in
writing a request to cancel this Automatic Renewal, the new
Term will begin on a stated date. This requires additional
work upfront, but can prevent future problems if you want
to stay in the space.
3 What are my rights and obligations
as a subtenant?
As a Subtenant, your right to occupy the commercial space
is based on the original Lease agreement. As a Subtenant,
there are several important things to consider:
1. The Master-tenant must have the right to Sublease the
premises to you. If the Master-tenant has that right, the
Lease will usually have a Sublease clause which requires
the Landlord’s permission. Most Sublease clauses state
that a Landlord should not reasonably deny the right to
Sublease.
2. As a Subtenant, your rights are based on the original
Lease. For instance, if the original Lease is terminated, then
your rights are also terminated. It is therefore very important to review and understand the entire original Lease
agreement. You are required to follow the same terms and
conditions.
3. As a Subtenant, you are entering into a contract with the
Master-tenant not the landlord. Since the Mater-tenant is
required to follow the existing lease, they may not be able
to negotiate more favorable terms for you.
4. Under Subtenancy, the premises are usually rented “as
is.” This means that you are assuming responsibility for
any repairs or modifications to the space. Although the
Master-tenant is responsible for the original Lease, the
landlord may also hold you responsible for any damage or
alterations.
5. Again, be sure to review the Lease and any Addendums
or changes to the original Lease. The original Lease may
have terms and conditions that are not appropriate for your
business type. It is important to understand your obligations under the original Lease.
Although subleasing is very common, it is not always the
best option for business owners. In order to create a new
Lease agreement there must be Novation, or a new contract directly with the Landlord (see the Terminology section
for more information). This is the only way to ensure that
you are getting a Lease that is tailored to your business
needs and that you are negotiating the best terms and
conditions for your business.
II. LEASING TERMINOLOGY
W
A.
In this section we discuss the key terms you will need to understand in reviewing your lease.
We have organized the terms in main subject categories: Lease Types, Common Terms & Clauses,
Rent, and Common Legal Terms. There is also an alphabetical listing at the end of this pamphlet
for your use.
COMMERCIAL LEASE TYPES
The purpose of this section is to provide information about common Lease types and the definitions of these common Lease Types. There are many Commercial Lease types out there, but these are the most frequently used.
Net Lease: The Tenant is responsible for Rent plus Property Taxes.
NN or Double Net Lease: The Tenant is responsible for Rent plus the Property Taxes and Insurance.
NNN or Triple Net Lease: The Tenant is responsible for Rent plus the Tenant pays for their share of the Property Taxes,
Insurance, and Operating Costs.
Gross Lease: Tenant pays one set Rent amount and the Landlord pays all owning and operating expenses. Expenses such
as: water, garbage, maintenance costs, etc. These are most common in multi-tenant buildings.
Modified Gross Lease: In addition to the Rent, the Tenant is responsible for janitorial services provided in their space.
Industrial Gross Lease: In addition to the Rent, the Tenant is responsible for paying for their share of utilities and janitorial
service.
Full Service Lease: All expenses, including utilities and janitorial service, are included in the Rent. These are most common
in Subleases or shared spaces.
Index Lease: The amount of Rent depends on a price index such as the Consumer Price Index (CPI). The CPI is published
by the Bureau of Labor Statistics of the Department of Labor. This is considered a neutral percentage rate, because neither
the Landlord nor the Tenant is picking the increase rate. This percentage rate reflects the market in your city or state.
Percentage Lease: The amount of Rent is a percentage of gross of sales. Your Rent will vary from year to year based on
the success of your business.
Graduated Lease: The amount of Rent for future years can vary depending on specific factors, such as gross income or an
annual percentage increase.
Step up Lease: Rent is increased by a pre-set rate or set amount, to be paid on a set schedule.
Straight Lease or Flat Lease: The amount of Rent is fixed for the Lease Term.
Master Lease: This is a primary Lease that controls the Leases that follow. The Original leaseholder/Tenant will become
the Master Tenant when a Sublease is created.
Sublease: The original Tenant assigns some or all of their interest to a third party. The original Tenant becomes the Master
Tenant, and the new Tenant becomes the Subtenant. This option does not replace the original Tenant and the original Tenant is still responsible for the rent and any damages for the Term of the Lease. The only way to be released from liability for
the Original Lease is through Novation. Unless Novation occurs, with the Landlord’s approval, the Original Tenant/Master
Tenant is still the responsible party.
9
B.
COMMON LEASE TERMS AND CLAUSES
This section is intended to help you understand the most common terms and clauses in the Lease you have or are
about to sign. This is not an exhaustive list and does not include every possible term and clause, but these are the
most common. With this understanding you should be able to better negotiate and better understand your obligations and rights in the proposed Commercial Lease agreement.
Landlord: Also known as the Lessor, can be the owner of
Novation: This requires all three parties to consent, the
the property or the property management company.
and the Tenant (Lessee). The Landlord owns the property
and allows the Tenant to use the property in exchange for
monetary payments called Rent.
Landlord, the Tenant (assignor) and the new Tenant (Assignee). This creates a new contract and transfers all duties
and obligations to the new Tenant/Assignee. This usually
creates a new contract with the same terms and conditions as the current contract, but the parties are different.
The Landlord and the new Tenant are the only parties to
this new contract, and the former Tenant is released of all
obligations under the old Lease.
Term: The length of time the Lease is valid, which should
Pro-Rata Share: This is the percentage of a building that
Tenant: Also known as the Lessee, usually the business
owner.
Party: The parties to a lease are the Landlord (Lessor)
include the beginning and ending dates of the Lease. This
information is important for future rent calculation and
renewal options, as well as protecting the Tenant’s rights.
the Tenant occupies. It is usually based on the Rentable
Square Footage compared to the total square footage of the
building.
Premise: The location, address and square footage of
Common Area: Common areas include elevators, shared
the space to be leased, and should be clearly defined or
described in the Lease.
Renewal Option: The right of a tenant to renew or extend
the term of a lease for a period of time at Rent to be determined. The renewal may be for an additional Lease Term
(same period of time as original Lease) or a set term such
as 5 or 10 years. The rent may be based on the fair market
Rent or based on the current Rent. The option to renew is
only an agreement to negotiate in good faith. A stronger
form of the renewal options is an Automatic Renewal (see
below).
Automatic Renewal: The Lease continues based on the
current terms until either the Tenant or the Landlord gives
notice to the other party, usually in writing, that they will be
terminating the lease.
Sublease clause: Subleasing rights establish the rules for
renting a Tenant’s space to a third party, the Subtenant.
This is an important term and reasonableness language
should be included, such as “the landlord cannot unreasonably withhold the right to sublease.”
Assignment: Assigning your Lease to a third party with the
Landlord’s consent. This may prevent you from selling or
transferring a business without the Landlord’s consent. Assignment does not eliminate the Tenant’s obligations to the
Landlord; this only transfers the rights and benefits to the Assignee, such as use of the space. For release of obligation and
new contract creation there must be Novation (see below).
bathrooms, and mechanical rooms, etc. These are nonexclusive areas, which each tenant shares, but does not
directly control. Each tenant is usually responsible for a prorata share of the costs.
Usable Square Feet: The square feet measured within a
Tenant’s space. This is the actual space the Tenant occupies.
This may include private bathrooms, storage or closet space
located within the Tenant’s space, not the common areas.
Rentable Square Feet: The total amount of square feet
that a Tenant pays for. The usable square feet plus the
percentage cost of the common areas. This is important to
understand when relocating. You may be paying the same
Rent for a new space, but what you are currently paying
in Rent is more than just your own space. The Rentable
Square Feet also includes common areas, such as the
lobby, public restrooms, etc.
Load Factor or Loss Factor: The percentage difference
between the usable space and the rentable space, usually
between 10% and 15%. The higher the Load Factor, the
more money you are spending on common areas, not for
the actual space your business occupies.
Operating Expenses: These are building operating ex-
penses, not business expenses. The Lease may dictate that
the Tenants are responsible for their percentage share of
these costs and any annual increases. Operating expenses
associated with the building include janitorial services and
maintenance, etc. This term will vary based on the type of
Lease such as Full Service, Triple Net, or Industrial Gross.
Trade Fixtures: Trade fixtures are equipment that a Ten-
tion of the premises when the Lease is agreed to. This
includes any physical defects or zoning issues.
ant specifically installs for the operation of their business.
These are unique items to the business, however, if the
fixture has been affixed or permanently attached to the
premises, then it may become the property of the Landlord
at the end of the Lease, if there is no specific language
stating otherwise. This is important because Trade fixtures
such as a bar or a restaurant hood can be very expensive to
replace.
Tenant Paid Improvement: Tenant pays the costs of im-
Right of First Offer (ROFO): A Tenant’s right to make the
provements on the property.
first offer on a space to lease or buy. The Landlord must
approach the Tenant first with the opportunity. The Tenant then has the right to make an offer for a limited time
period. This is only an agreement to negotiate in good faith.
Shell: A space without improvements or finishes.
Turn Key: The property is completely ready for a Tenant to
move in, and no improvements need to be made.
“As-Is” Condition: The Tenant accepts the existing condi-
Tenant Improvement Allowances: This allowance is
a fixed amount of money contributed by the Landlord
towards Tenant improvements that is built into the monthly
Rent.
Right of First Refusal (ROFR): A right, in writing, usually
ises, provided by the Landlord. The Landlord and Tenant
establish the cost and the budget. The costs of the improvements are then included in the monthly rent. The Landlord
pays for the improvements and handles the contracts for
the improvements.
given by the Landlord, which gives the Tenant a first chance
to buy or lease a portion of the property if the owner decides to sell or lease. The terms of the process are spelled
out. This is not just an agreement to negotiate in good
faith. The Landlord must have an offer, which the Tenant
can match or refuse. If the Tenant refuses, the property can
then be sold or leased to the offeror.
Work Letter: The work letter defines the type of improve-
Relocation Clause: This clause gives the landlord the right
Turn Key Build-out: Tenant Improvements to the prem-
ments and estimated cost for Tenant improvements or
build-out in the space.
Build-out: The Landlord provides an allowance or a loan
to move the Tenant during the Lease period. This term
may include a description of an alternative space and have
a clear definition of the condition for the relocation.
to the Tenant for improvements and the Tenant is responsible for the contracts and managing the build-out. The
loan is repaid as part of the monthly Rent for the life of the
Lease.
Access: Determines the amount of access you have to
Tenant Improvements (TI’s): These are the improvements
Security: Describes building security, such as alarms and
built within the rental space. The Tenant is usually responsible for the improvements. This term establishes how the
space will be delivered, who will perform the work and the
amount it will cost. Furniture, fixtures and equipment are
considered separate from TI’s.
C.
the property as a whole as well as the usable space. There
may be limitations in larger buildings, but generally access
should be unlimited.
security personnel, and access, such as security password,
personal identification number (PIN) or security key card.
Anchor Tenant: The major or prime Tenant in a shopping
center or a huge building.
RENT
The Rent clause is probably the most recognized clause in a Commercial Lease Agreement, however it is not always
clearly understood. The rental amount may be unclear because there is no definition of square footage, which
makes it difficult to calculate the actual rental rate for the usable Square Footage. That is why it is important to understand the definitions in the previous section (i.e. Usable Square Feet vs. Rentable Square Feet) so you can get the
clarity you need from the Landlord to better understand what you are paying in Rent. Also, understanding the annual or periodic Rent increases will help you figure out how much your Rent is even at the end of your Lease. There
are also additional costs, such as Assessments or Maintenance which are passed on to you through the Rent. Be
sure to know the market rate for Rent in the area you are interested in so you can better negotiate a fair rental rate.
11
Rental Rate: The initial Lease rate and any increases (typi-
cally annual). This is also the place to define the type of
rent such as Full Service, Industrial Gross or Triple Net, etc.
200% of the normal monthly rent. This is a huge percentage increase and should be negotiated prior to signing the
lease.
Rent: The sum of money the Tenant is obligated to pay the
Rent Concession: This is period of free rent given to
Landlord for the Lease Term.
Tenant by the landlord. It can be associated with Tenant
Improvements, where the Landlord does not charge rent
for the time when improvements are being made and the
business is not operating. May be used as a negotiating
tool.
Full Service Rent: The Rent includes all Operating Expens-
es and Taxes.
Rent Escalations: The amount a Tenant’s Rent increases
year to year. The most common escalation is based on the
CPI (Consumer Price Index) or a percentage of the annual
rent. Percentages vary, but should be kept to a minimum,
such as 3%-5%.
Base Year: A Base Year is usually the first year of the lease
and is generally established in the Lease, except in Triple
Net (NNN) Leases. The Tenant is responsible for paying
its share of the expense increases for each of the following
years.
Holdover Rent: The amount of additional Rent a Tenant
must pay if they remain in their space after the lease term
expires. Holdover Rent is typically between 150% and
D.
Amortization: Costs which Landlord passes on to the Ten-
ant as additional Rent during the term of the lease. The landlord may offer to amortize the cost of improving the space by
adding the cost to the Tenant’s rental payments, when there
are Tenant improvements. (See Turn-Key Build-out).
Assessment: A fee imposed on property, usually to pay
for public improvements such as street improvements or
sewers.
Common Area Maintenance (CAM): Amount charged to
Tenants for maintenance and upkeep of shared restrooms,
parking lots, landscaping, etc.
COMMON LEGAL TERMS
Below are some of the common legal terms or phrases you may see in your lease.
The Americans with Disabilities Act: The Americans with
Disabilities Act (ADA) requires all businesses that are open
to the public or that employ more than 15 people to have
premises that are accessible to disabled people. The Lease
should state who would pay for any needed modifications,
such as adding a ramp or widening doorways to accommodate wheelchairs.
Certificate of Occupancy: Certification by a local govern-
landlord’s rights and obligations. Usually requested by
Landlord prior to the sale of property or refinancing the
building.
Go Dark: This clause allows the Landlord to void the lease
when a Tenant closes a business while the lease is still in
effect. Relieves both parties of obligations.
Hazardous Waste: This clause usually states that the
ment agency or building department that a building or the
leased premises has been inspected and are suitable for
occupancy.
Tenant is not allowed to have any hazardous waste on the
premises. The clause may include a list of materials, which
are considered to be hazardous.
Condemnation: If the building is taken by the government,
Lien: A legal claim filed against a property for payment of a
deemed unusable or is condemned, then the Lease maybe
forfeited.
debt or obligation.
Landlord’s Lien (Warrant): A Landlord lien can be put in
Encumbrance: Any claim or Lien against the property, held
by someone other than the Landlord. Including mortgages,
tax liens, mechanic’s liens, etc.
the lease. This is a guarantee and notice from the landlord
for the ability to levy Tenants personal property to pay back
rent owed.
Estoppel Certificate: A statement by a Tenant, which
Letter of Intent (LOI): A written agreement with the
provides important information in the lease, such as the
security deposit amount, status of Tenant (not in default),
proposed terms for the final contract, such as rental amount,
rental increases, lease term, etc. It can be binding, but is usu-
ally just a detailed outline of the proposed Lease Agreement.
Right to Terminate: Landlord may allow for an early termi-
nation for a fee paid by the Tenant. This fee may be based
on several months Rent and any additional cost to the
Landlord for re-renting the premises. This is a good option
for start-up businesses as long as the fee is not excessive.
Security Deposit: The amount of money the Tenant pays
to the Landlord to guarantee that the Tenant will fulfill all
obligations under the lease. The Landlord holds the deposit
for the term of the lease and it may be used to settle defaults or damages to the property. If security deposit is used
to pay rent owed, the landlord may require that the amount
be replaced within a fixed period of time.
Zoning: The rules and regulations imposed by the City
which control the types of uses allowed in a certain area.
Zoning may limit the size of a location, the type of business
which may operate on the property (such as retail or fullservice restaurant), and may limit the hours of operation.
Meditation: Both parties voluntarily agree to work with a
mediator, a neutral third party, to craft their own agreement.
Mediation agreements are confidential and may be binding.
The mediator is not a judge or a fact-finder. They will not
make a decision in your case.
Arbitration: Alternative to the judicial system, the arbitrator
where it may be displayed, and who pays for maintenance.
will make a decision about the case and it may be binding.
This system is not a court proceeding but it may seem like
one, and the arbitrator may be a retired judge or lawyer.
This process is usually faster and less costly than the judicial
system.
Subrogation Clause: Usually waives Landlord’s liability
Parking: Description of parking space or location, such as
Signage: Specifies the type of signage you are allowed,
against lawsuits which may be filed against the Tenant or the
Business.
Variance: A variance is a city permit or permission to use
the amount of parking you are entitled to and the costs.
Parking agreements may be separate from the lease
agreement and should be in writing.
or develop a property in a way which is not permitted by
the zoning regulations.
13
III.DEFAULT: UNLAWFUL DETAINER
@
A Default occurs when one or more conditions of the Lease Agreement are broken. The most common example is non-payment of Rent. However, breaking any of the Lease conditions may be cause
enough for the Landlord to try to take back the premises and cancel the Lease Agreement.
While we hope that you will never need this information for your business, it is very important to
understand the rules, procedures, and timeline for an eviction. There are several steps to an eviction,
and the Landlord cannot just change the locks or keep your inventory or property without proper notice. This process
can take as little as two weeks, so it is important to know how the process works.
We have provided a flow chart of the Eviction process in the following section, and below is a general description of what
may happen in the event of Default on your Lease. As you will see, the Notice to Vacate is only the beginning. You will
have important decisions to make as the process moves along and may want to seek professional legal assistance.
A.
Description of the Process If a Default occurs, the notice process will depend on the terms of the Lease. If the Rent is late, the owner legally has the
right to issue a Notice to Vacate. This may be based on non-payment of Rent or another breach of covenant or condition in
the Lease. The Landlord has the right to issue this notice the day after rent is considered late, unless your Commercial Lease
agreement has a grace period or states otherwise. After the notice period expires, three (3) to eight (8) days later, the landlord may start legal proceedings known as an Unlawful Detainer (Eviction). This means they may start an Eviction case with
the Superior Court in your county. This may have long-term consequences. New Landlords can access this public information from the court and many do as a part of the initial credit check. If they see there is an Eviction on your record, they may
be less likely to rent to you.
Once the summons and complaint are filed, it is the Landlord’s responsibility to make sure you receive a copy. Once you
receive the summons and complaint, you will have five (5) days from the time of service to file a response. If you do file a
response, this will continue the case to the next stage, which is a trial by judge or jury depending on which one you select.
A jury trial is often viewed as more favorable to the Tenant because the request for a jury trial will automatically trigger a
mandatory settlement conference. This settlement conference is an opportunity for both the Landlord and the Tenant to try
to work out a settlement.
If you have the back Rent or you can make reasonable payments, the Landlord may be willing to dismiss the case against
you or file what is known as a stipulation. The stipulation is a binding agreement, and it is important that you read and understand all of the obligations under the stipulation. If you fail to comply with the stipulation, such as making a payment just
one day late, the Landlord may be free to request a judgment against you without allowing you the opportunity to state your
side of the case.
If you cannot reach an agreement, or if you selected a trial by a judge, you will have your day in court. This means you will
have to show up to court and present your case to the judge. (If you need an interpreter you will need to bring your own,
because unlike criminal cases the court does not provide an interpreter.) The judge will usually make their decision right
away from the bench. If not, the judge will mail your judgment to the address you have on file with the court. It is unlikely
the judge will take your case under submission and send you notice by mail because Eviction cases are fast-tracked and
generally processed very quickly.
It is important to read and understand the Default clause in your Lease. Most of these clauses require that the losing party
pay for the winning party’s attorney fees. This means that in addition to any back rent, repair or damage cost, and court cost,
you may be responsible for thousands of dollars in attorney fees. For this reason, and the fact that Evictions remain on your
rental credit history, it is a good idea to avoid Default on the Commercial Lease agreement and comply with all of the terms
of the contract.
B.
Unlawful Detainer Procedures and Flow Chart
15
IV. SAMPLES & TOOLS
E
A.
Sample Lease Agreement
This sample Lease is intended to help you understand how all of the terms and details will look in the
contract. This sample Lease contains the most common Clauses and Conditions. However, your Lease may
look different and contain different Clauses. This is because there are so many different lease types and
terms. The following section will provide additional Lease Clauses, and you can look there for a Clause
that you do not find in the sample Lease.
COMMERCIAL LEASE AGREEMENT
This lease is made between __________________________, herein called Lessor, and _________________________
_______, herein called Lessee, agree upon the following TERMS and CONDITIONS:
1) Property: Lessee hereby offers to lease from Lessor the premises situated in the City of ____________, County of
____________, State of _____________, described as: ________________________________, herein called
premises, which comprises approximately _____% of the total square footage of rentable space in the entire property.
2) Lease Term: The term shall be for a term of ________ years, commencing on ________________, 20___ and terminating on ______________, 20___, or sooner as provided herein.
3) Base Rent: Annual rental amount of ______________ Dollars ($_________) payable in equal installments in advance
on the first day of each month for that month’s rental, during the term of this lease. All rental payments shall be made to
Lessor, at the following address __________________________________.
4) Rental increases:
a) $_________________, commencing with the 13th month and upon each 12 months thereafter, percentage increase
based on ____________________.
b) $__________________, step one, increase commencing ____________ and ending ______________.
$__________________, step two, increase commencing _____________ and ending ___________.
$__________________, step three, increase commencing ____________ and ending _______________.
$__________________, step four, increase commencing ____________ and ending _______________.
c) $__________________, commencing with the 13th month and upon each 12 months thereafter rent shall be adjusted
according to any increase in the U.S. Consumer Price Index (CPI) of the Bureau of Labor Statistics of the Department of
Labor for All Urban Consumers for the City of ___________.
d) In accordance with the attached rent schedule.
e) Other: ______________________________________________________.
5) Security Deposit: Lessee shall deposit with Lessor on the signing of this lease the sum of ________________ Dollars ($
______________) as security deposit for the performance of Lessee’s obligations under this lease, including without limitation the surrender of possession of the premises to Lessor as herein provided. If Lessor applies any part of the deposit to
cure any default of Lessee, Lessee shall on demand deposit with Lessor the amount so applied so that Lessor shall have the
full deposit on hand at all times during the term of this lease. No interest will be paid on security deposit, unless required
by local ordinance.
6) Use: Lessee shall use and occupy the premise for the sole purpose of ______________________________________
_______________________________________________________________________________________. The
premises shall be used for no other purpose. Lessor represents that the premises may lawfully be used for such purpose.
7) Late Charge, Interest, NSF check: Tenant acknowledges that either late payment of Rent or issuance of NSF check may
cause Lessor to incur costs and expenses and Lessee agrees that these charges represent a fair and reasonable estimate of
the cost Lessor may incur due to Lessee’s late or NSF payment. If any installment or Rent due from Lessee is not received
by Lessor within 5 calendar days after due, or if a check is returned NSF, Lessee shall pay to Lessor, _________ Dollars
($_______) as late charge, and if applicable, NSF fee, which shall not be deemed additional Rent.
8) Possession: If Lessor is unable to deliver possession of the premises at the commencement hereof, Lessor shall not be liable for any rent until possession is delivered. Lessee may terminated this lease if possession is not delivered within days of
the commencement of the term hereof.
9) Alterations: Lessee shall not, make any alterations, additions, or improvements, in or about the premises, without first
obtaining the written consent of Lessor. Any alterations to the premises shall be done according to Law and with required
permits.
10) Condition of premises: Lessee acknowledges that the premises are in good order and repair, unless otherwise indicated
herein.
11) Ordinances and Statutes: Lessee shall comply with all statutes, ordinances and requirements of all municipal, state and
federal authorities now in force or which may hereafter be in force, pertaining to the premises, occasioned by or affecting
the use thereof by Lessee.
12) Assignment and Subletting: Lessee shall not assign this lease or sublet any portion of the premises without prior written
consent of the Lessor, which shall not be unreasonably withheld. Any such assignment or subletting without consent shall
be void and, at the option of the Lessor, may terminate this lease.
13) Care and Maintenance of Premises: Lessee shall, at his own expense and at all times, maintain the premises in good and
safe condition, including plate glass, electrical wiring, plumbing and heating installations and any other system or equipment upon the premises, and shall surrender the same at termination hereof, in as good condition as received, normal wear
and tear excepted. Lessee shall be responsible for all repairs required, excepting the roof, exterior walls, structural foundations, ____________________________.
14) Utilities: All applications and connections for necessary utility services on the demised premises shall be made in the name
of Lessee only, and Lessee shall be solely liable for utility charges as they become due, including those for sewer, water, gas,
electricity, and telephone services.
15) Common Area Expenses: In the event the premises are situated in a shopping center or in a commercial building in which
there are common areas, Lessee agrees to pay his pro-rata share of maintenance, taxes, and insurance for the common
area.
17
16) Entry and Inspection: Lessee shall permit Lessor or Lessor’s agents to enter upon the premises at reasonable times and
upon reasonable notice, for the purposes of inspecting the same, and will permit Lessor at any time within sixty (60) days
prior to the expiration of this lease, to place upon the premises any usual “To Let” or “For Lease” signs, and permit persons
desiring to lease the same to inspect the premises thereafter.
17) Indemnification of Lessor: Lessor shall not be liable for any damage or injury to Lessee, or any other person, or to any
property, occurring on the demised premises or any part thereof, and Lessee agrees to hold Lessor harmless from any claim
for damages, no matter how caused.
18) Tax Increase: In the event there is any increase during any year of the term of this lease in the City, County or State real
estate taxes over and above the amount of such taxes assessed for the tax year during which the term of this lease commences, whether because of increased rate or valuation, Lessee shall pay to Lesser upon presentation of paid tax bills an
amount equal to _______% of the increase in taxes upon the land and building in which the leased premises are situated.
In the event that such taxes are assessed for a tax year extending beyond the term of the lease, the obligation of Lessee shall
be proportionate to the portion of the lease term included in such year.
19) Insurance: Lessee, at his expense, shall maintain plate glass and public liability insurance including bodily injury and property damage insuring Lessee and Lessor with minimum coverage as follows:
Lessee shall carry liability insurance in amount of not less than $____________ dollars ($_________). Lessee shall provide Lessor with a Certificate of Insurance showing Lessor as additional insured. The Certificate shall provide for a ten-day
written notice to Lessor in the event of cancellation or material change of coverage. To the maximum extent permitted by
insurance policies which may be owned by Lessor or Lessee, Lessee and Lessor, for the benefit of each other, waive any and
all rights of subrogation which might otherwise exist.
20) Eminent Domain: If the premises or any part thereof or any estate therein, or any other part of the building materially
affecting Lessee’s use of the premise, shall be taken by eminent domain, this lease shall terminate on the date when title
vests pursuant to such taking. The rent, and any additional rent, shall be apportioned as of the termination date, and any
rent paid for and period beyond that date shall be repaid to Lessee. Lessee shall not be entitled to any part of the award for
such taking or any payment in lieu thereof, but Lessee may file a claim for any taking of fixtures and improvements owned
by Lessee, and for moving expenses.
21) Destruction of Premises: In the event of a partial destruction of the premises during the term hereof, from any cause, Lessor shall forthwith repair the same, provided that such repairs can be made within sixty (60) days under existing governmental laws and regulations, but such partial destruction shall not terminate this lease, except that Lessee shall be entitled
to a proportionate reduction of rent while such repairs are being made, based upon the extent to which making the repairs
cannot be made within sixty (60) days, Lessor, at his option, may make the same within a reasonable time, this lease continuing in effect with the rent proportionately abated as aforesaid, and in the event that Lessor shall not elect to make such
repairs which cannot be made within sixty (60) days, this lease may be terminated at the option of either party. In the event
that the building in which the demised premises may be situated is destroyed to an extent of not less than one-third of the
replacement cost, Lessor may elect to terminate this lease whether the demised premises be injured or not. A total destruction of the building in which the premises may be situated shall terminate this lease.
22) Heirs, Assigns, Successors: This lease is binding upon and passes on to the benefit of the heirs, successors in interest to
the parties.
23) Subordination. This lease is and shall be subordinated to all existing and future liens and encumbrances against the
property.
24) Lessor’s Remedies on Default: If Lessee defaults in the payment of rent, or any additional rent, or defaults in the performance of any of the other covenants or conditions hereof, Lessor may give Lessee notice of such default and if Lessee does
not cure any such default within ____ days, after the giving of such notice or if such other default is of such nature that
it cannot be completely cured within such period, if Lessee does not commence such curing within such ____ days and
thereafter proceed with reasonable diligence and in good faith to cure such default, then Lessor may terminate this lease
on not less than _____days notice to Lessee.
On the date specified in such notice the term of this lease shall terminate, and Lessee shall then quit and surrender the
premises to Lessor, but Lessee shall remain liable as hereinafter provided. If this lease shall have been so terminated by
Lessor, Lessor may at any time thereafter resume possession of the premises by any lawful means and remove Lessee or
other occupants and their effects. No failure to enforce any term shall be deemed a waiver.
25) Tenancy Statement (Estoppel Certificate): Lessee shall execute and return a tenancy statement, delivered to Lessor,
within 3 days after receipt. Tenant shall also prepare, execute, and deliver to Lessor any financial statement reasonably
requested by a prospective lender or buyer.
26) Attorney’s Fees: In case suit should be brought for recovery of the premises or for any sum due hereunder, or because
of any act which may arise out of the possession of the premises, by either party, the prevailing party shall be entitled to
all costs incurred in connection with such action, including reasonable attorney’s fees.
27) Option to renew: Provided that Lessee is not in default in the performance of this lease, Lessee shall have the option to
renew the lease for an additional term of ______ months commencing at the expiration of the initial lease term. All of
the terms and conditions of the lease shall apply during the renewal term except that the monthly rent shall be the sum
of $______________. The option shall be exercised by written notice given to Lessor not less than ________ days
prior to the expiration of the initial lease term. If notice is not given in the manner provided herein within the time specified, this option shall expire.
28) Notices: Any notice which either party may, or is required to give, shall be given by mailing, postage prepaid, to Lessee
at the premises, or Lessor at the address shown below, or at such other places as may be designated by the parties from
time to time.
29) Other Terms and Conditions:
________________________________________________________________________________________
________________________________________________________________________________________
___________________________________________________________________________________
30) Entire Agreement. The foregoing constitutes the entire agreement between the parties and may be modified only in
a writing signed by both parties. The following Exhibits, if any, have been made a part of this lease before the parties’
execution hereof:
Lessor: ______________________________
Date: ________
Lessee: ______________________________
Date:_________
19
B.
COMMON CLAUSES IN A COMMERCIAL LEASE (Samples)
These are a few of the more common Commercial Lease Clauses which were not part of our sample Commercial
Lease. We have discussed what some of these clauses mean in the terminology section above, but below are some
samples of what these clauses may look like. If one of these clauses is in your Lease, you should try to negotiate
more favorable terms, since each of these is written to protect the Landlord’s interest.
HOLDOVER RENT:
If Tenant fails to vacate the Premises at the end of the Term,
then Tenant shall pay, in addition to the other rent due
hereunder, a daily Base Rent equal to (a) for the first sixty
(60) days, One Hundred Fifty Percent (150%) of the daily
Base Rent payable during the last month of the Term, and
(b) thereafter and until such time as the Premises are surrendered, Two Hundred Percent (200%) of the daily Base
Rent payable during the last month of the Term. Additionally,
Tenant shall defend, indemnify, and hold harmless Landlord
from any damage, liability and expense (including attorneys’
fees and expenses) incurred because of such holding over.
No payments of money by Tenant to Landlord after the
Term shall reinstate, continue or extend the Term, and no
extension of this Term shall be valid unless it is in writing
and signed by Landlord and Tenant.
AMERICANS WITH DISABILITIES ACT:
The parties are hereby notified of the existence of the
Americans With Disabilities Act, which may require costly
structural modification in order to comply with the letter
of the law. The parties are hereby advised to consult a
professional who may provide additional information about
compliance with the Act.
TRADE FIXTURES:
Any and all improvements made to the premises during the
term will belong to the Lessor, except trade fixtures of the
Lessee. Lessee may upon termination, remove all trade
fixtures, but will pay for all costs necessary to repair any
damages to the premises caused by the removal.
CASUALTY DAMAGE:
Tenant immediately shall give written notice to Landlord of
any damage to the Premises or the Building. If the Premises
or the Building are totally destroyed by an insured peril, or
so damaged by an insured peril that, in Landlord’s reasonable estimation, rebuilding or repairs cannot be substantially
completed within 180 days after the date of Landlord’s
actual knowledge of such damage, then either Landlord or
(if a Tenant Party did not cause such damage) Tenant may
terminate this Lease by delivering to the other written notice
thereof within thirty (30) days after such damage, in which
case, the rent shall be abated during the unexpired portion
of this Lease, effective upon the date such damage occurred. Time is of the essence with respect to the delivery of
such notices.
LANDLORD’S DEFAULT:
If Landlord fails to perform any of its obligations hereunder within thirty (30) days after written notice from Tenant
specifying such failure, Tenant’s exclusive remedy shall be
an action for damages.
LIABILITY, INDEMNIFICATION, WAIVER OF SUBROGATION AND NEGLIGENCE:
(a) Tenant shall, to the maximum extent permitted by Law,
protect, indemnify, defend, and hold harmless Landlord,
its successors, assigns, agents, employees, contractors,
partners, directors, officers and affiliates (collectively, the
“INDEMNIFIED PARTIES”) from and against all fines, suits,
losses, costs, liabilities, claims, demands, actions and judgments of every kind or character (1) arising from Tenant’s
failure to perform its covenants hereunder, (2) arising from,
or caused, wholly or in part, by a Tenant Party or any other
person entering upon the Premises under or with a Tenant Party’s express or implied invitation or permission, (3)
arising from or out of the occupancy or use of the Premises
by a Tenant Party or arising from or out of any occurrence in
the Premises, howsoever caused, or (4) suffered by, recovered from or asserted against any of the Indemnified Parties
by the employees, agents, contractors, or invitees of Tenant
or its subtenants or assignees. However, such indemnification of the Indemnified Parties by Tenant shall not be applicable if such loss, damage, or injury is caused by the sole
active negligence or willful misconduct of Landlord or any of
its duly authorized agents or employees.
(b) Landlord and Tenant both waive any claim it might have
against the other for any damage to or theft, destruction,
loss, or loss of use of any property, to the extent the same is
insured against under any insurance policy maintained by it
that covers the Building, the Premises, Landlord’s or Tenant’s
fixtures, personal property, leasehold improvements, or
business, or is required to be insured against by the waiving
party under the terms hereof, regardless of whether the
negligence or fault of the other party caused such loss. Each
party shall cause its insurance carrier to endorse all applicable policies waiving the carrier’s rights of recovery under
subrogation or otherwise against the other party.
HAZARDOUS WASTE:
The term “Hazardous Substances”, as used in this Lease,
shall mean pollutants, contaminants, toxic or hazardous
wastes, or any other substances, the removal of which is
required or the use of which is restricted, prohibited or
penalized by any “ENVIRONMENTAL LAW”, which term shall
mean any Law relating to health, pollution, or protection of
the environment. Tenant hereby agrees that (a) no activity
will be conducted on the Premises that will produce any
Hazardous Substances; (b) the Premises will not be used in
any manner for the storage of any Hazardous Substances,
nuisance; and (c) Tenant will not permit any Hazardous
Substances to be brought onto the Premises, except for
the stated Permitted Materials, and if so brought or found
located thereon, the same shall be immediately removed
by Tenant, with proper disposal, and all required cleanup
procedures shall be diligently undertaken pursuant to all
Environmental Laws. If at any time during or after the Term,
the Premises are found to be so contaminated or subject to
such conditions as a result of Tenant’s use of the Premises
or breach of this Lease, Tenant shall defend, indemnify
and hold Landlord harmless from all claims, demands,
actions, liabilities, costs, expenses, damages and obligations of any nature arising from or as a result of the use of
the Premises by Tenant. Landlord may enter the Premises
and conduct environmental inspections and tests therein
as it may require from time to time, provided that Landlord
shall use reasonable efforts to minimize the interference
with Tenant’s business. Such inspections and tests shall be
conducted at Landlord’s expense, unless they reveal the
presence of Hazardous Substances
RIGHT OF FIRST OFFER:
Tenant shall be granted a conditional right to make a first
offer to lease additional space in the Premises on the terms
and conditions set forth in the attached EXHIBIT.
CONDEMNATION:
If the entire Premises shall be appropriated or taken under
the power of eminent domain by any governmental or quasi-governmental authority or under threat of and in lieu of
condemnation (hereinafter, “taken” or “taking”), this Lease
shall terminate as of the date of such taking, and Landlord
and Tenant shall have no further liability or obligation arising under this Lease after such date, except as otherwise
provided for in this Lease.
Landlord and Tenant, immediately after learning of any taking, shall give notice thereof to each other, in writing.
RADON GAS DISCLOSURE:
As required by law, Landlord discloses that Radon Gas is a
naturally occurring radioactive gas that when it has accumulated in a building in sufficient quantities may present health
risks to persons who are exposed to it over time. Levels of
radon that exceed federal and state guidelines have been
found in buildings in California. Additional information
about radon and radon testing may be obtained from your
county public health organization.
21
C.
SAMPLE LEASE ADDENDUM
This section provides a sample Commercial Lease Addendum. It is important to include any changes or modifications to the Lease in an Addendum and attach it to the original Lease. This will help you understand and locate
your new obligations. Also, this will help protect your rights if the Landlord fails to comply with something they
agreed to do in writing – you will have proof of their obligation. An Addendum becomes part of the Lease.
COMMERCIAL LEASE AGREEMENT
ADDENDUM
The following terms and conditions are herby incorporated in and made part of the Commercial Lease Agreement dated
______________________, on premises situated in the City of ________________________, County of _______
____________, State of _________________, described as: ______________________________, herein called
premises. In which _______________________________, herein called Lessor, and ________________________
____________, herein called Lessee, agree upon the following TERMS and CONDITIONS:
1.
___________________________________________________________________________________
__________________________________________________________________________________________
________________________________________________________________________
2.
___________________________________________________________________________________
__________________________________________________________________________________________
________________________________________________________________________
3.
___________________________________________________________________________________
__________________________________________________________________________________________
________________________________________________________________________
4.
___________________________________________________________________________________
__________________________________________________________________________________________
_________________________________________________________________________
5.
___________________________________________________________________________________
__________________________________________________________________________________________
________________________________________________________________________
Lessor: ________________________________________
Date: __________________
Lessee: ________________________________________
Date: __________________
Lessor’s Initials: ___________
Lessee’s Initials: ___________
Date: ____________________
D.
SAMPLE SUBLEASE AGREEMENT
This section provides a sample Sublease Agreement. It is important to spell out all of the obligations and conditions of the agreement before the subtenant moves in. Most Commercial Leases require the Landlord’s permission to Sublease. The sample Sublease Agreement we have provided requires the Landlord’s signature. The
most important thing to remember about Subleasing is that you, the Master-tenant, are still responsible for the
Commercial Lease. The Subtenant does not take your place. If they fail to pay the rent, even years later, the
Landlord may still sue you for nonpayment of rent. The only way to be released from your obligations under the
Commercial Lease is through Novation (See the Terminology section for a definition.)
COMMERCIAL SUBLEASE AGREEMENT
This sublease is made between _______________________________, herein called Sublessor and _______________
_____________________, herein called Sublessee agree to the following TERMS AND CONDITIONS:
Wherefore, ________________________, the Sublessor, has entered into a Lease contract with the Property Owner/
Landlord of the premises located at: _____________________________, ________________________, California
and has agreed to enter into this contract under certain terms and conditions.
The Parties mutually agree to the following:
1.
RENT: _______________________________________________________________
2.
TERM: ________________________________________________________________
3.
SECURITY DEPOSIT: ____________________________________________________________________
___________________________________________________________________________________
4.
UTILITIES: ___________________________________________________________________________
___________________________________________________________________________________
5.
ADDITIONAL COST: ____________________________________________________________________
___________________________________________________________________________________
6.
___________________________________________________________________________________
___________________________________________________________________________________
7.
___________________________________________________________________________________
____________________________________________________________________________________
In Witness Hereto, the above-named parties agree to the terms and conditions set forth above. Entered into on ________
____________________________, 20____.
____________________ _______________________
Sublessor
_______________________
Sublessee
Landlord/Owner
23
E.
a
a
a
Lease Negotiation Checklist
Step one
Gather all the information necessary to negotiate what you need. Below is a suggested list of items that will
help you be best prepared, but at the very least you will want to know your ideal location, the current market
rate for similar spaces near that location, and what you can afford. We highly recommend you create a Business Plan that helps you identify these most important pieces of information.
a Location Address
a Lease Term
a Market Rate Rent
a Security Deposit
a Competing Businesses
a Utilities Budget
a Major Intersections
a General Improvements
a Public Transportation
a Taxes
a Desired Rent
a Insurance
a Maximum Rent
a Additional Items
Step two:
Make a list of all the things you must have, and all the things which you could live without if it means getting
a better deal for your business. The latter are your bargaining tools.
Must-Have/Deal Breakers :
Concessions/bargaining chips:
I
________________________________________
I
________________________________________
I
________________________________________
I
________________________________________
I
________________________________________
I
________________________________________
I
________________________________________
I
________________________________________
Step Three:
Be Confident and know what you want. Most of things you need can be negotiated.
F. Move-in CHECKLIST
In this section we have provided a Move-in Checklist to help you plan your move and keep all of the most important Conditions of the Lease in one place. There is also room on the Checklist for names, addresses, due dates, etc. for quick reference.
1.
Review the lease and verify information:
p
Party names: ______________________________________________________________________
p
Individual addresses: _______________________________________________________________
p
Premises: _________________________________________________________________________
p
Square footage: ____________________________________________________________________
p
Rent: _____________________________________________________________________________
p
Rent due date: _____________________________________________________________________
p
Security Deposit amount: ____________________________________________________________
p
Utilities: __________________________________________________________________________
p
Property taxes based on prior year: ____________________________________________________
p
Insurance coverage: ________________________________________________________________
p
Additional cost / Maintenance: ________________________________________________________
25
Most of the below you should have already addressed in your business plan:
2. Improvements/permits; if permits are necessary for improvements, wait time can be 6 weeks
or more. Additional cost associated with improvements (see Lease terms).
3. Contact movers, make sure they are bonded and insured.
4. Update or purchase insurance for the new location.
5. Order new furniture/equipment, verify delivery dates, donate unused items.
6. Transfer all utilities.
7. Update bank information and order new checks.
8. Make all necessary arrangements for computer services i.e. wireless.
9. Update business licenses with the City (Sole Proprietorships) or Secretary of State
(Corporation, LLC/LP)
10. Order/change all necessary letterhead.
11. Update website and phone messages.
12. Advertise new business location.
13. Complete a walk through, take pictures, keep receipts for all expenses.
14. Letter of Intent – state terms and conditions of the Lease (see Lease terms).
15. Business Loans – secure capital for improvements or start-up costs.
V. ADDITIONAL RESOURCES
Legal Resources:
1
Bar Association of San Francisco Referral
To make an appointment with a private attorney who specializes in the area of services you need, for a $30 fee.
(415) 989-1616. www.sfbar.org
1
Volunteer Legal Services Program of the Bar Association of San Francisco (VLSP)
Provides assistance with Collection Claims, Bankruptcy, Mediation, and Arbitration. VLSP provides free representation in various cases and for people of low-income. (415) 982-1600.
1
The Legal Advice and Referral Clinic (LARC)
These clinics are held the second Saturday of every month and are free of charge. This program is not based on income and
is on a first come, first serve basis. You will receive a brief consultation with a private attorney, if they cannot assist you they
may provide you with a legal referral (Lawyer Referral and Information Service -LRIS). The clinic is held the second Saturday
of every month from 10:30 am – 12:00 pm at UC Hastings College of the Law near Civic Center.
1
Legal Services for Entrepreneurs (LSE)
Provides services for small business owners who operate or want to start up a small business. LSE has a panel of private
attorneys from top firms who donate their time to assist small business owners with transactional services such as letters of
incorporation. You must complete an application in order to participate. LSE does not provide legal representation for litigation or claims. (415) 543-9444. www.lccr.com/lse.shtml
1
Bay Area Legal Aid
Provides assistance with housing rights, public benefit issues, domestic violence advocacy and general legal referrals. (415)
982-1300 or www.baylegal.org
1
Access Center:
San Francisco Superior Court’s Legal Self-Help Center. Provides general assistance and information about civil claims, including evictions, restraining orders, mediation services, and small claims. Located at 575 Polk St. San Francisco, CA 94102.
1
La Raza Centro Legal.
Provides assistance with labor claims, immigration, evictions, and limited civil claims (415) 575-3500. www.lrcl.org.
1
Lawyers Committee for Civil Rights.
Provides assistance and representation for a variety of Civil Rights including discrimination claims, housing rights, youth rights,
and public benefits. www.lawyerscomm.org.
27
Internet Resources:
8 www.Nolopress.com
Nolo Press publishes various manuals and self-help legal forms.
8 www.Legalmatch.com
Legal Match provides a list of private attorneys in the bay area with their area of practice.
8 www.Findlaw.com
Find Law provides legal information and educational resources. Also, has a listing for local private attorneys.
8 www.craigslist.com
Local on-line resource for small business rental spaces.
8 www.rofo.com
On-line small business real estate resource.
8 www.sfbizinfo.com
San Francisco Business Information provides local information about economic development services and
small business resources.
Independent Resources:
C Department of Building Inspection: 1660 Mission Street, (415) 558-6164 or www.sfgov.org
C San Francisco Human Rights Commission.
(415) 252-2500 or www.sfgov.org
C Community Boards Mediation Program.
Conflict resolution and mediation services. 3130 24th St. San Francisco, CA 9411.
(415) 920-3820. www.communityboards.org
C California Department of Fair Employment and Housing. 1-888-758-9911 o www.dfehmp.ca.gov
C Eviction Defense Collaborative. Assistance for residential tenants ONLY. 995 Market, San Francisco, Ca 94103 (415) 986-9586.
C Housing Rights Committee.
Provides educational information and advocacy for residential tenants. (415) 398-6200 o
www.hrcsf.org
C San Francisco Tenants Union. Provide educational materials and counseling for residential tenants with legal issues.
(415) 282-6622 or www.sftu.org
C San Francisco Residential Rent Stabilization and Arbitration Board. Provides mediation and arbitration for residential tenants.
They do not offer services for Commercial Tenants. (415) 252-4602.
VI. ALPHABETICAL INDEX OF TERMS
i
“As-Is” Condition: The Tenant accepts the
terminating the lease.
existing condition of the premises when the
Lease is agreed to. This includes any physical defects or zoning issues.
Base Year: A Base Year is usually the first year of the lease
Access: Determines the amount of access you have to the
property, as a whole as well as the usable space. There may
be limitations in larger buildings, but generally access should
be unlimited.
Americans with Disabilities Act: The Americans with
Disabilities Act (ADA) requires all businesses that are open
to the public or that employ more than 15 people to have
premises that are accessible to disabled people. The Lease
should state who would pay for any needed modifications,
such as adding a ramp or widening doorways to accommodate wheelchairs.
and is generally established in the Lease, except in Triple
Net (NNN) Leases. The Tenant is responsible for paying
its share of the expense increases for each of the following
years.
Build-out: The Landlord provides an allowance or a loan to
the Tenant for improvements and the Tenant is responsible
for the contracts and managing the build-out. The loan is
repaid as part of the monthly Rent for the life of the Lease.
Certificate of Occupancy: Certification by a local govern-
ment agency or building department that a building or the
leased premises has been inspected and are suitable for
occupancy.
Amortization: Costs which Landlord passes on to the Ten-
Common Area Maintenance (CAM): Amount charged to
ant as additional Rent during the term of the lease. The
landlord may offer to amortize the cost of improving the
space by adding the cost to the Tenant’s rental payments,
when there are Tenant improvements. (See Turn-Key Buildout).
Common Area: Common areas include elevators, shared
Tenants for maintenance and upkeep of shared restrooms,
parking lots, landscaping, etc.
center or a large building.
bathrooms, and mechanical rooms, etc. These are nonexclusive areas, which each tenant shares, but does not
directly control. Each tenant is usually responsible for a prorata share of the costs.
Arbitration: Alternative to the judicial system, the arbitrator
Condemnation: If the building is taken by the government,
will make a decision about the case and it may be binding.
This system is not a court proceeding but it may seem like
one, and the arbitrator may be a retired judge or lawyer.
This process is usually faster and less costly than the judicial
system.
deemed unusable or is condemned, then the Lease maybe
forfeited.
Encumbrance: Any claim or Lien against the property, held
Assessment: A fee imposed on property, usually to pay for
Estoppel Certificate: A statement by a Tenant, which
Anchor Tenant: The major or prime Tenant in a shopping
public improvements such as street improvements or sewers.
Assignment: Assigning your Lease to a third party with the
Landlord’s consent. This may prevent you from selling or
transferring a business without the Landlord’s consent. Assignment does not eliminate the Tenant’s obligations to the
Landlord; this only transfers the rights and benefits to the
Assignee, such as use of the space. For release of obligation and new contract creation there must be Novation (see
Novation).
Automatic Renewal: The Lease continues based on the
current terms until either the Tenant or the Landlord gives
notice to the other party, usually in writing, that they will be
by someone other than the Landlord. Including mortgages,
tax liens, mechanic’s liens, etc.
provides important information in the lease, such as the
security deposit amount, status of Tenant (not in default),
landlord’s rights and obligations. Usually requested by Landlord prior to the sale of property or refinancing the building.
Full Service Lease: All expenses, including utilities and
janitorial service, are included in the Rent. These are most
common in Subleases or shared spaces.
Full Service Rent: The Rent includes all Operating Expenses
and Taxes.
Go Dark: This clause allows the Landlord to void the lease
when a Tenant closes a business while the lease is still in
29
effect. Relieves both parties of obligations.
Graduated Lease: The amount of Rent for future years can
vary depending on specific factors, such as gross income or
an annual percentage increase.
Gross Lease: Tenant pays one set Rent amount and the
Landlord pays all owning and operating expenses. Expenses
such as: water, garbage, maintenance costs, etc. These are
most common in multi-tenant buildings.
Hazardous Waste: This clause usually states that the
Leases that follow. The Original leaseholder/Tenant will
become the Master Tenant when a Sublease is created.
Meditation: Both parties voluntarily agree to work with a
mediator, a neutral third party, to craft their own agreement.
Mediation agreements are confidential and may be binding.
The mediator is not a judge or a fact-finder. They will not
make a decision in your case.
Modified Gross Lease: In addition to the Rent, the Tenant
is responsible for janitorial services provided in their space.
Tenant is not allowed to have any hazardous waste on the
premises. The clause may include a list of materials, which
are considered to be hazardous.
Net Lease: The Tenant is responsible for Rent plus Property
Holdover Rent: The amount of additional Rent a Tenant
Rent plus the Property Taxes and Insurance.
must pay if they remain in their space after the lease term
expires. Holdover Rent is typically between 150% and
200% of the normal monthly rent. This is a huge percentage
increase and should be negotiated prior to signing the lease.
Index Lease: The amount of Rent depends on a price
Taxes.
NN or Double Net Lease: The Tenant is responsible for
NNN or Triple Net Lease: The Tenant is responsible for
Rent plus the Tenant pays for their share of the Property
Taxes, Insurance, and Operating Costs.
Novation: This requires all three parties to consent, the
Industrial Gross Lease: In addition to the Rent, the Tenant
Landlord, the Tenant (assignor) and the new Tenant (Assignee). This creates a new contract and transfers all duties
and obligations to the new Tenant/Assignee. This usually
creates a new contract with the same terms and conditions
as the current contract, but the parties are different. The
Landlord and the new Tenant are the only parties to this
new contract, and the former Tenant is released of all obligations under the old Lease.
is responsible for paying for their share of utilities and janitorial service.
Operating Expenses: These are building operating ex-
index such as the Consumer Price Index (CPI). The CPI is
published by the Bureau of Labor Statistics of the Department of Labor. This is considered a neutral percentage rate,
because neither the Landlord nor the Tenant is picking the
increase rate. This percentage rate reflects the market in
your city or state.
Landlord: Also known as the Lessor, can be the owner of
the property or the property management company.
Landlord’s Lien (Warrant): A Landlord lien can be put in
the lease. This is a guarantee and notice from the landlord
for the ability to levy Tenants personal property to pay back
rent owed.
Letter of Intent (LOI): A written agreement with the pro-
posed terms for the final contract, such as rental amount,
rental increases, lease term, etc. It can be binding, but is usually just a detailed outline of the proposed Lease Agreement.
penses, not business expenses. The Lease may dictate that
the Tenants are responsible for their percentage share of
these costs and any annual increases. Operating expenses
associated with the building include janitorial services and
maintenance, etc. This term will vary based on the type of
Lease such as Full Service, Triple Net, or Industrial Gross.
Parking: Description of parking space or location, such as
the amount of parking you are entitled to and the costs.
Parking agreements may be separate from the lease agreement and should be in writing.
Party: The parties to a lease are the Landlord (Lessor) and
debt or obligation.
the Tenant (Lessee). The Landlord owns the property and
allows the Tenant to use the property in exchange for monetary payments called Rent.
Load Factor or Loss Factor: The percentage difference
Percentage Lease: The amount of Rent is a percentage of
Lien: A legal claim filed against a property for payment of a
between the usable space and the rentable space, usually
between 10% and 15%. The higher the Load Factor, the
more money you are spending on common areas, not for
the actual space your business occupies.
Master Lease: This is a primary Lease that controls the
gross of sales. Your Rent will vary from year to year based
on the success of your business.
Premise: The location, address and square footage of the
space to be leased. Should be clearly defined or described
in the Lease.
Pro-Rata Share: This is the percentage of a building that
the Tenant occupies. It is usually based on the Rentable
Square Footage compared to the total square footage of the
building.
Relocation Clause: This clause gives the landlord the right
to move the Tenant during the Lease period. This term may
include a description of an alternative space and have a
clear definition of the conditions of the relocation.
Renewal Option: The right of a tenant to renew or extend
the term of a lease for a period of time at Rent to be determined. The renewal may be for an additional Lease Term
(same period of time as original Lease) or a set term such
as 5 or 10 years. The rent may be based on the fair market
Rent or based on the current Rent. The option to renew is
only an agreement to negotiate in good faith. A stronger
form of the renewal options is an Automatic Renewal (see
Automatic Renewal).
Rent Concession: This is period of free rent given to
Tenant by the landlord. It can be associated with Tenant
Improvements, where the Landlord does not charge rent for
the time when improvements are being made and the business is not operating. May be used as a negotiating tool.
Rent Escalations: The amount a Tenant’s Rent increases
year to year. The most common escalation is based on the
CPI (Consumer Price Index) or a percentage of the annual
rent. Percentages vary, but should be kept to a minimum,
such as 3%-5%.
Rent: The sum of money the Tenant is obligated to pay the
Landlord for the Lease Term.
Rentable Square Feet: The total amount of square feet that
a Tenant pays for. The usable square feet plus the percentage cost of the common areas. This is important to understand when relocating. You may be paying the same Rent
for a new space, but what you are currently paying in Rent
is more than just your own space. The Rentable Square
Feet also includes common areas, such as the lobby, public
restrooms, etc.
Rental Rate: The initial Lease rate and any increases (typi-
cally annual). This is also the place to define the type of rent
such as Full Service, Industrial Gross or Triple Net, etc.
Right of First Offer (ROFO): A Tenant’s right to make the
first offer on a space to lease or buy. The Landlord must
approach the Tenant first with the opportunity. The Tenant
then has the right to make an offer for a limited time period.
This is only an agreement to negotiate in good faith.
Right of First Refusal (ROFR): A right, in writing, usually
to buy or lease a portion of the property if the owner decides to sell or lease. The terms of the process are spelled
out. This is not just an agreement to negotiate in good
faith. The Landlord must have an offer, which the Tenant
can match or refuse. If the Tenant refuses, the property can
then be sold or leased to the offeror.
Right to Terminate: Landlord may allow for an early termi-
nation for a fee paid by the Tenant. This fee may be based
on several months Rent and any additional cost to the
Landlord for re-renting the premises. This is a good option
for start-up businesses as long as the fee is not excessive.
Security Deposit: The amount of money the Tenant pays
to the Landlord to guarantee that the Tenant will fulfill all
obligations under the lease. The Landlord holds the deposit for the term of the lease and it may be used to settle
defaults or damages to the property. If security deposit is
used to pay rent owed, the landlord may require that the
amount be replaced within a fixed period of time.
Security: Describes building security such as alarms and
security personnel, and access such as security password,
personal identification number (PIN) or security key card.
Shell: A space without improvements or finishes.
Signage: Specifies the type of signage you are allowed,
where it may be displayed, and who pays for maintenance.
Step up Lease: Rent is increased by a pre-set rate or set
amount, to be paid on a set schedule.
Straight Lease or Flat lease: The amount of Rent is fixed
for the Lease Term.
Sublease clause: Subleasing rights establish the rules for
renting a Tenant’s space to a third party, the Subtenant. This
is an important term and reasonableness language should
be included, such as “the landlord cannot unreasonably
withhold the right to sublease.”
Sublease: The original Tenant assigns some or all of their
interest to a third party. The original Tenant becomes the Master Tenant, and the new Tenant becomes the Subtenant. This
option does not replace the original Tenant and the original
Tenant is still responsible for the rent and any damages for
the Term of the Lease. The only way to be released from
liability for the Original Lease is through Novation. Unless
Novation occurs, with the Landlord’s approval, the Original
Tenant/Master Tenant is still the responsible party.
Subrogation Clause: Usually waives Landlord’s liability
against lawsuits which may be filed against the Tenant or
the Business.
given by the Landlord, which gives the Tenant a first chance
31
Tenant Improvement Allowances: This allowance is a
Turn Key Build-out: Tenant Improvements to the prem-
fixed amount of money contributed by the Landlord towards
Tenant improvements that is built in to the monthly Rent.
ises, provided by the Landlord. The Landlord and Tenant
establish the cost and the budget. The costs of the improvements are then included in the monthly rent. The Landlord
pays for the improvements and handles the contracts for
the improvements.
Tenant Improvements (TI’s): These are the improvements
built within the rental space. The Tenant is usually responsible for the improvements. This term establishes how the
space will be delivered, who will perform the work and the
amount it will cost. Furniture, fixtures and equipment are
considered separate from TI’s.
Tenant Paid Improvement: Tenant pays the costs of im-
provements on the property.
Tenant: Also known as the Lessee, usually the business
owner.
Term: The length of time the Lease is valid, which should
include the beginning and ending dates of the Lease. This
information is important for future rent calculation and renewal options, as well as protecting the Tenant’s rights.
Trade Fixtures: Trade fixtures are equipment that a Tenant
specifically installs for the operation of their business. These
are unique items to the business, however, if the fixture has
been affixed or permanently attached to the premises, then
it may become the property of the Landlord at the end of
the Lease, if there is no specific language stating otherwise.
This is important because Trade fixtures such as a bar or a
restaurant hood can be very expensive to replace.
Turn Key: The property is completely ready for a Tenant to
move in. No improvements need to be made.
Usable Square Feet: The square feet measured within a
Tenant’s space. This is the actual space the Tenant occupies.
This may include private bathrooms, storage or closet space
located within the Tenant’s space, and not the common
areas.
Variance: A variance is a city permit or permission to use
or develop a property in a way which is not permitted by
the zoning regulations.
Work Letter: The work letter defines the type of improve-
ments and estimated cost for Tenant improvements or
build-out in the space.
Zoning: The rules and regulations imposed by the City
which control the types of uses allowed in a certain area.
Zoning may limit the size of a location, the type of business
which may operate on the property (such as retail or fullservice restaurant), and may limit the hours of operation.