Original article posted in Inside Tucson Business here.
Your contract to lease Tucson commercial space will guide the use of your space for years. Be sure you understand and agree to these terms before you officially accept that contract.
Building Maintenance. These provisions detail who’s responsible for space maintenance and repairs. A full-service gross lease covering multi-tenant property means the landlord provides utilities and janitorial and maintenance services. A net lease requires the tenant to pay for those services.
Access. Normally you will have access to your premises all the time. Many services that the owner is obliged to provide will be available only during the building operating hours. These include HVAC, guard services and building engineers. You will be required to pay for services if you need them beyond normal operating hours.
Late Charge. Owners charge fees to offset the cost of collecting late rent and to help prevent late payments. Most leases provide a grace period of three to five days, but you may negotiate more days.
You may also negotiate one or two incidents of forgiveness of late charges per year.
Interest rate for late payment is for longer, uncured monetary defaults. It’s applied to those overdue amounts on top of any late charges.
Operating Expense. Also called the “additional rent” clause, this provision allows the property owner to pass increases of operating expenses to the tenant.
Normally, this pass-through begins in the second year of the lease. The first year is called the base, or comparison, year. Any increased expenses above the base year is apportioned to all of the tenants.
Escalation. This clause protects you from income erosion tied to inflation. The lease contract rent is a promise to pay in future dollars. Inflation causes the future value of money to have less purchasing power.
Flat Rate Increases. Some owners of small properties may not want to calculate rent increases and discuss them with tenants. Instead, they might ask for an annual flat percentage increase.
While this is easier for both parties, this kind of increase is typically based on the entire rental payment.
Tax Increase. Negotiate a cap on controllable expenses such as taxes on the sale of the property. Even if an owner has no plans to sell the property during your lease term, taxes can increase if the property is transferred for estate planning reasons or because of death.
Use. Define your use of the space in a way that gives you flexibility during business model changes. You also don’t want to restrict your rights to sublease or assign the lease. This is particularly important for a retail or industrial tenant.
Sublet. If you have to move before the contract to lease Tucson commercial space expires, you can sublet or assign the lease.
Know your rights and obligations, as well as the owner’s rights. The owner will always want to consent to any assignment or subletting.
Early Termination. If you must leave your space and subletting won’t work, you may negotiate an early lease termination. There are costs to this. You probably will pay several months of rent while the owner finds a substitute tenant.
If the owner gave you substantial amounts of improvements, you will need to repay the unamortized portion of that fee.
While early termination can be expensive, this may be preferable to being a sublessor with its potential liabilities.
Commercial Real Estate Group of Tucson can review your current or potential contract to lease Tucson commercial space and explain your rights and obligations under these and other terms. Contact us at 299-3400.