Key Glossary for Commercial Leases
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Reading a commercial lease agreement can often feel like you are trying to learn a new language, unless you work in the legal profession. This is because specific terminology, which we don’t often hear in our day-to-day interactions, is used to draft the most effective agreements. Understanding a few commonly used terms can make a significant difference when reading a commercial lease agreement. However, it is still advisable to seek legal advice before signing any lease agreement.
Here are some of the key terms found in commercial lease agreements:
The Lessor, or “Landlord”, is the owner of the property. The Lessor may be a person, company or legal entity. The lessor leases the property to the Lessee or “Tenant”.
The Lessee, or “Tenant”, is the person, company or legal entity who occupies the premises and pays rent to the Lessor.
- Offer to Lease/Term Sheet
An offer to lease or term sheet is a bullet-point list outlining the material terms and conditions of the lease agreement. This will be used during the negotiation stage to determine the base rent, incidental expenses, lease period and other key terms. This document acts as a guide for legal counsel to draft the formal agreement.
- Base Rent
This is the minimum amount the tenant pays to the landlord monthly to occupy the premises. It is often calculated in relation to the square footage of the premises. Additional rent can be added on each month, depending on the terms of the agreement.
- Incidental Expenses
These are the costs of operating and maintaining the property in addition to base rent, such as property taxes, insurance, utilities, and repairs. The tenant or the landlord may be responsible for these costs depending on the type of lease agreement.
- Additional Rent
These are incidental expenses that the tenant is responsible for paying. These expenses are added on to the base rent amount each month.
- Gross Lease
This is a type of lease agreement under which the tenant pays a flat rate to the landlord, usually on a monthly basis, covering base rent and any incidental expenses. The landlord then takes care of all incidental expenses that arise. This is the most simplified type of lease agreement.
- Percentage Lease
This is a type of lease agreement where the tenant pays a base rent amount each month plus a percentage of their monthly sales or monthly sale volumes above a certain amount. This type of agreement is typically seen in a commercial retail lease agreement.
- Net Lease
This is a type of lease agreement under which the tenant pays the landlord for base rent and one incidental expense, such as property tax. The tenant may pay the incidental expense directly or may remit payment to the landlord. The landlord is responsible for all other expenses.
- Double Net Lease
This is a type of lease agreement under which the tenant pays for base rent, plus two incidental expenses, such as property taxes and utilities. The landlord is responsible for all other expenses.
- Triple Net Lease
This is a type of lease agreement under which the landlord is not responsible for any costs outside of structural repairs to the building. The tenant is responsible for base rent and all incidental expenses.
TMI stands for “Taxes, Maintenance and Insurance”. This acronym is often used in a net, double net or triple net lease where the tenant is responsible for paying a portion or all of these expenses.
ILA stands for “Independent Legal Advice”. Lease agreements often advise each party to obtain independent legal advice before signing the agreement. If the parties decide not to obtain independent legal advice, this clause precludes them from later being able to renege on the agreement and claim that they did not understand what they were signing.
- Trade Fixtures
These are items that the tenant can remove from the premises when they move out. These fixtures are installed by the tenant for use in their business and can be installed and removed with minimal damage to the premises. The tenant is typically responsible for repairs if the installation or removal of trade fixtures causes damage to the premises. For example, trade fixtures may include furniture or display counters.
- Leasehold Improvements
A leasehold improvement is an alteration that is attached to the premises. Tenants may wish to make permanent changes to the premises so that the space is more suitable to run their business. Leasehold improvements become the property of the landlord and cannot be removed when the tenant moves out. For example, leasehold improvements include flooring or drywall.
Please contact Michael Paiva for more information about commercial leases, or if you require assistance with negotiating lease terms or drafting or reviewing a commercial lease.