Introduction To Commercial Lease Agreements | Real Estate Essentials

The following article has been extracted from the manual “Fast Tenant’s Guide to Understanding Commercial Lease Agreements.

Let’s cover some basics. A lease contract is an agreement entered between two parties, the tenant and the landlord. The tenant, which usually in the contract is defined as lessee will enter the agreement to gain the right to use a certain premise for commercial purposes, such as renting a office, operating a restaurant, opening a retail store and so on. To gain this right, the lessee will pay in exchange a sum of money that is called rent. The rent can be fixed, variable or additional. We are going to cover more in detail each of these aspects. On the other side of the agreement there is the Landlord, which in legal lingo is called lessor. The lessor surrenders his right to use the premise that he owns or that he manages but in exchange he will gain the right to receive a sum of money, which is called rent.

Therefore so far we have two parties, the Lessee, or tenant or renter, and the Lessor, or landlord, or lessor. But why in the first place would you enter a lease agreement? Wouldn’t you be better off without one?

The Advantage of Signing a Written Agreement

Although this may sound trivial, entering a written lease agreement is convenient for both landlord and tenant. In fact, since in most cases things work out smoothly between the parties, this creates in people’s mind the feeling that a written agreement may be not needed. Many other in fact, realize the importance of a written agreement when things get messy. In that case not having a written agreement in your favor can turn really bad. In fact, although you may think that an agreement is just a piece of paper where you note how much rent you will have to pay to the landlord, this piece of paper is much more than that. Imagine the case in which things don’t work out as planned. You didn’t deem necessary to enter a written agreement, since you trusted the landlord of the rented premise, because you knew him since long time. Unfortunately you learned that when it comes to money people could change their attitude very quickly. Indeed, the landlord does not keep the promise he had made when he shook your hand and now he is asking you to leave the premise immediately. There is a problem though. You performed some renovation on his premises just because you agreed to be there for few years, thus you rightfully want your money back. The landlord/dishonest person does not agree and he gets the premise back without paying you a dime. In turn, you bring him to court, and since you are in the right you also believe that you will easily win against the landlord. Once in court, the judge asks for evidence but the only existing agreement between you and the landlord is a handshake. You say the truth, that the landlord agreed you could stay in the premise for few years and that is why you renovated the building. The landlord on his side lies shamelessly. Yet the judge doesn’t know that. Therefore, the judge declines your claim. In conclusion, you lost time, health and money, for what? You could have saved all that by just signing a written agreement! You learned your lesson and moved forward. This means that the agreement is a tool that clarifies the responsibilities of each party.

As we saw in the previous example, while the lease agreement will save you in the event in which things will not work out as they were supposed to. On the other hand, the lease agreement can also be very tricky for the tenant if he doesn’t know its content. Let’s see why it is important to know the content of the lease agreement.

The Importance of Carefully Reading the Lease Agreement

If the contract is a helpful tool that can rescue the tenant from screw-ups, at times it can also be a tricky tool used by the landlord to mess up with the tenant. I know you may be thinking, “a lease is just a piece of paper and of course I am going to read it carefully before signing it” but in my experience this does not often happen. Many tenants don’t really know the content of their lease agreements. The only exception is for tenants that aren’t physical persons but corporations, which have a dedicated department for legal matters, thus they usually know more in detail the content of the commercial lease. Does it mean that you have to hire someone to carefully read your lease? Absolutely not, in this manual I will explain what are the strategies to use to carefully understand your lease agreement. Beside, I am not accusing tenants to be shallow, quite the opposite. At times it is the way the legal system works that makes things too complex for the average person. In fact a commercial lease at times can be as long as 100 pages! In addition, you will find terms such as eminent domain, estoppel certificate; lien and so on that only help to generate more confusion. In addition to that usually a lease can have the so-calledaddenda (plural for addendum), which are specifications to the main lease. I am not surprised that eventually the tenant is unwilling to deal with all these boring papers. On the other hand, it is crucial to learn how to deal with commercial leases if you are an entrepreneur or merchant because this understanding can save you thousand of dollars.

This article provided a quick introduction to Commercial Leases. To know more about the topic consult the short-manual from which this article has been extracted “Fast Tenant’s Guide to Understanding Commercial Lease Agreements.

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Gennaro Cuofano, International MBA. Author of "The Enlightened Accountant," and "The Art of Mentorship."

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