Understanding the Terminology in Your Commercial Lease
When entering into a commercial lease, it is critical to make informed decisions. This starts with understanding the terminology involved. Like all contracts, commercial leases incorporate a lot of legal terminology. But, these contracts include terms that are unique to the commercial leasing relationship as well—and this is among the reasons why it is important to choose a lawyer who has specific experience handling commercial lease negotiations.
Glossary: Key Terms in a Commercial Lease
What legal and real estate terms do you need to know in order to make informed decisions during your commercial lease negotiations? Here is a glossary of some of the key terms you are likely to encounter:
An anchor tenant is a business that leases space in a multi-unit retail facility such as a mall or shopping center. The anchor tenant is typically a large and well-known business, such as a big-box or department store. For these businesses, serving as an anchor tenant can provide leverage for negotiating certain key lease terms. For other businesses, incorporating anchor tenant provisions into their commercial leases can provide protection in the event that an anchor tenant leaves and foot traffic dwindles.
Assignment is the right to transfer a commercial lease to another party. Commercial lessors generally reserve broad assignment rights so that they can sell their properties freely and without the need to engage with their tenants. Conversely, commercial lessors generally seek to restrict tenants’ assignment rights so that they can maintain control over the businesses that occupy their premises. During negotiations, tenants will frequently seek to negotiate concessions that allow them to assign their lease rights subject to the lessor’s reasonable approval.
Base rent forms the foundation of the total amount the tenant has to pay in order to maintain the commercial lease throughout its term. It is typically expressed as a price per square foot per year. Depending on the structure of a commercial lease (i.e., whether the lease is a full-service gross (FSG) or triple net (NNN) lease), various other costs may be added to the base rent to establish the tenant’s total financial responsibility.
Oftentimes, commercial leases will include a “Base Year” provision that is used for purposes of calculating the tenant’s increasing liability for expenses over time. The base year is typically the first year of the lease, and the lease will (or should) include provisions that clearly outline the factors to be considered in determining the lessee’s expense liability.
Common Area Maintenance (CAM)
Common area maintenance (CAM) charges are also a frequent target for negotiation. Commercial lessors will seek to transfer as much liability for CAM charges to their tenants as possible, while tenants will want to ensure that their responsibility for CAM charges is proportionate to their use (and their customers’ use). Tenants will generally want to ensure that this calculation is made objectively and that they have the ability to audit their CAM charge responsibility periodically.
Exclusivity can be key to the success of a retail business. If you are opening an ice cream parlor, you do not want your lessor to be able to lease the unit next door to a direct competitor. Negotiating an appropriate exclusivity clause into your commercial lease ensures that this won’t happen. Exclusivity clauses can vary widely in terms of their scope (i.e., prohibiting other ice cream parlors versus prohibiting any other dessert restaurant), and the scope of exclusivity will often be a key point of negotiation.
Full-Service Gross (FSG)
In a full-service gross (FSG) lease, the tenant is solely liable for base rent. The tenant is not liable for CAM charges or any other property-related expenses. As a practical matter, however, these expenses are often factored into the calculation of rent in an FSG lease, and tenants must be careful to ensure that they are not overpaying for their use of the leased premises and common areas.
Modified Gross (MG)
Under a modified gross (MG) lease, the tenant is responsible for base rent and select property-related expenses, such as electricity, other utilities or security. Modified gross leases are commonly used when neither party wants a triple net (TNN) lease but the tenant’s use of the property will result in an above-average expense (i.e., an exceptionally high electricity bill).
Subleasing is similar to assignment in that it allows a tenant to shift financial responsibility for a commercial lease (or part of a commercial lease) to a third party. However, unlike tenants that assign a commercial lease, tenants that sublet their premises generally remain liable to the lessor in the event that the subtenant fails to pay what it owes. As a result, subleasing can be risky, and tenants must be careful to ensure that they have adequate protections in place under both the lease and sublease.
Triple Net (NNN)
A triple net (NNN) lease is a commercial lease under which the tenant is responsible for base rent along with (i) property taxes, (ii) building insurance, and (iii) CAM expenses. While there are various ways to calculate tenants’ financial responsibility for these expenses under a triple net lease, one common approach is to estimate the lessor’s total annual expenses in these three areas and then use the tenant’s percentage of the facility’s total square footage to determine the tenant’s percentage of responsibility.
The “Use” clause in a commercial lease specifies the type of business the tenant can operate on the property. While this might seem straightforward, commercial tenants must be careful to ensure that their use rights are sufficiently broad to allow for expansion or modification of their product lines or services, while commercial lessors will want to clearly define their tenants’ authorized uses for purposes of addressing exclusivity, liability risk and various other issues.
Contact a Commercial Real Estate Lawyer in Miami or Fort Lauderdale
If you need help drafting or negotiating a commercial lease for a property in Florida, we invite you to contact us for more information. To speak with a commercial real estate lawyer at our offices in Miami or Fort Lauderdale, please call 305-768-9909 or inquire online today.