In short, any changes need to have the tenant's signature either as an amendment or as an option they agreed to within the original lease. Just like tenants have the right to expect their landlord to follow the lease, the landlord also has the right to expect tenants to follow the lease.
There are, of course, exceptions to the rule. If the business is struggling or needs to move into a different space, the tenant may consider terminating the lease. If they do so, the landlord may have the right to sue the tenant for the remaining rent due on the lease.
In some states, the landlord may have a duty to mitigate that requires them to try to re-rent the space and offset the rent they receive against the damages that the tenant owes.
Tenants' legal obligations may vary based on how they signed the lease. For example, a sole proprietor might have full personal liability, while if the lease was under a failed corporation, the landlord would only be able to make a claim against any remaining corporate assets. Tenants may also have the right to sublease the commercial space to a new tenant. The original lease may prohibit or restrict subleasing. If it does not, tenants are generally allowed to sublease. Under most lease agreements, original tenants are responsible for any term in the original lease not covered by the new tenant plus any defaults by that new tenant.
That is, if the sublessee does not pay rent, the original tenant would have to pay the landlord. Another option is to assign the lease to the new tenant and get the landlord to agree to release the original tenant.
This is a more difficult process because the landlord will want to more thoroughly vet the new tenant before waiving any future liabilities. If the tenant and landlord can come to a mutually beneficial agreement, tenants may also be able to modify the existing lease. This is essentially a new lease even though the modified lease agreement may refer back to the original lease.
If the tenant does not pay rent or pays late, the landlord will generally be able to take collections action or begin eviction proceedings. Tenants should be aware that commercial evictions are often much faster and have fewer protections than residential leases. In addition, the landlord may have the right to change the locks prior to going to court if the tenant has not paid rent.
Disputes about lease terms often arise when the landlord and tenant cannot agree on who is responsible for a specific item. Often, this occurs when a provision in the lease was too vague or did not clearly include something that a party thought it did. Many commercial leases include an arbitration clause for resolving these types of disputes. An arbitration clause requires the parties to use and accept the decision of an arbitrator rather than filing court proceedings. While there is a lot that goes into a commercial lease, you do not have to reinvent the wheel.
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Net lease — The tenant pays all or part of taxes, insurance, or maintenance costs that would otherwise be incurred by the landlord in addition to the stated rent.
Double net lease — The tenant pays taxes, insurance, and rent. Triple net lease — The tenant pays taxes, insurance, maintenance, and rent. Percentage lease — The rent is based on a specified percentage of the tenant's sales or profits. Fully-serviced lease — The rent includes utilities and other services that the tenant would generally pay for separately common in office buildings with multiple tenants.
Landlords are very likely to provide favourable rental rates and terms to anchor tenants, as they help sustain the business of smaller retailers. Under the go dark clause, tenants can stop operations in an unprofitable space while still paying rent for it.
A tenant may choose to go dark for a few hours, days or weeks. They may wish to focus their resource on more profitable locations, or they may need time to overhaul the space decor. Consequently, if anchor tenants or multiple anchor tenants leave the retail space, it is likely to result in a drawback of foot traffic and less business for the remaining tenants. Thus, the need for a co-tenancy clause. A co-tenancy clause is a retail lease provision which provides the tenant with protection in the form of reduced rent to compensate for traffic loss.
The idea behind percentage rent is to give the owner the opportunity to negotiate the placement of a retailer in exchange for a percentage of their sales. If a tenant is experiencing periods of slower sales, the rent adjusts lower to accommodate the lower cash flow the tenant is experiencing. It provides a method to make the rent representative of the value the space has to the tenant over a wide range of profitability experiences. With a percentage rent lease, a tenant must first pay a minimum rent.
The percentage rent is often estimated and reconciled on a monthly or annual basis and may be averaged over a period of time. The breakpoint is an important negotiated method, as there can either be a natural or artificial breakpoint. Whereas, an artificial breakpoint may be determined by the bargaining power of the parties or specifics of the transaction. For example, a landlord may negotiate a breakpoint below the natural breakpoint, while a tenant with more clout may be able to negotiate a higher breakpoint.
Operating costs are common expenses that are paid frequently as they are necessary to operate and maintain a property. As noted throughout the article, operating expenses are often tacked onto a lease agreement in various forms. Some examples of operating expenses include property taxes, property insurance, maintenance expenses, utilities and administrative expenses.
Operating costs do not include capital expenditures, debt or amortized cost recovery. Unlike operating costs that are frequent and relatively low-cost, capital costs in a commercial lease are intermittent, expensive upgrades to the property that provide long term value. Some examples of capital costs include the installation of a new security system, a new parking lot or HVAC repairs. These expenses are paid by the landlord and then amortized over a period of years. Some leases allow these costs to be recovered under specific conditions and over a period that is specified in the lease agreement.
Typically, the amortized amount is charged monthly along with the rent and additional rent on an invoice for a specified period after the first replacement has occurred. Common area maintenance charges, also known as CAM expenses , are the fees paid for the upkeep of areas designated for use and benefit of all tenants in a shared space.
CAM expenses are common in multi-tenant lease agreements such as shopping centers and can include charges for parking lot maintenance, snow removal, utilities and more.
There are two basic calculations for CAM fees: variable CAM fees, where the amount charged to the tenant can vary based on expenses that may fluctuate monthly, and flat CAM fees, where the fees are a fixed amount. CAM cap refers to the maximum amount for which the tenant pays its share of common area maintenance costs, and the owner pays for any CAM expenses that exceed that amount.
For larger shopping centres, the anchor tenants may negotiate a flat CAM rate or CAM cap, and the remainder of the tenants will proportionally pay the balance of the CAM charges.
The best way to understand the ins and outs of commercial leasing and manage optimal lease terms is to work with a team of experienced professionals, including realtors, lawyers, accountants and tech partners. When it comes to calculating complex multi-tenant expenses, leveraging property management software like CRESSblue can help commercial leasing landlords automate cost-recovery calculations for more accurate and professional results.
CRESSblue is designed and backed by experienced commercial real estate professionals. This specialized net lease software efficiently handles custom leases for various unique circumstances — from multi-tenant to single-tenant, or any combination in between. This article is for informational purposes only and is not intended as professional advice; please consult a competent professional for advice specific to you.
This blog is written to stimulate thinking on concepts related to commercial leasing. Please join the discussion with your experiences. Follow me on LinkedIn. Martin also manages Karanda Properties Limited industrial portfolio as Director of Operations in all areas of commercial property management, including new development, asset management, capital expenditures, operations, leasing and lease administration of the industrial portfolio.
Martin writes about property management workflow and issues. Book Martin to speak at your industry event. CRESSblue is commercial property management software for multi-tenant properties that increases accuracy, compliance and transparency in net lease accounting and administration.
Our extreme automation helps you painlessly manage unique leases and accounting needs, including cost recoveries and reconciliations. HVAC distribution? These are all important specifications that will be outlined under the condition of the premises and delivery specifications in your lease. And of course, if you ever need help navigating your way through any of this, we are always here to help!
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