How to Draft a Commercial Lease Agreement: For Retail Owners
Why is locking in a solid commercial lease agreement so crucial for landlords and tenants in the retail world? Without a solid lease, both landlords and tenants are left vulnerable to misunderstandings, unexpected costs, and potential legal disputes. No one wants that!
Whether it’s a cozy boutique or a sprawling store in a shopping center, a well-crafted lease not only protects your rights, but also lays out clear responsibilities for everyone involved.
Ultimately, it offers the necessary protection to safeguard the long-term success of your retail business. So get your pencils ready, folks—here are the key elements every retail business owner should consider before signing a commercial lease agreement.
Step 1: Know Your Key Terms
Let’s start with the basics: vocabulary. A commercial lease agreement won’t do you much good if you don’t understand what you’re signing. That’s why formal contracts begin by definition with some important words and phrases so everyone is on the same page.
At the outset, your commercial lease must clearly define basic terms like:
“The Parties Involved”
Include both the landlord’s and tenant’s full legal names, as well as any business entities involved. If your business involves a trade name different from the legal name, be sure to specify that, too.
The clearer the terms, the better!
“Property Description”
Provide a detailed description of the leased premises, including its size and any common areas shared with other tenants.
“Lease Term”
Specify the start and end dates of the lease and whether there are any options for renewal or eventual buy-outs. It’s common in commercial leases to have several renewal periods, and they can often be extended and stacked for long periods of time.
An added benefit? Renewal terms can be optional, meaning you get to decide if you renew or not. This secures your option to keep your space long-term, but doesn’t tie you in if plans change.
“Rent and Payment Structure”
Outline the base rent amount, due dates, and any escalations or percentage rent clauses tied to the tenant’s sales. Smart lease agreements will include a cap on annual rent increases, often expressed in terms of a percentage.
Step 2: Define Permitted Use of the Property (Flexibility is Key)
The permitted use clause in a commercial lease dictates how the tenant can use the space. While landlords often prefer restrictive clauses to maintain control over the property, tenants often need more flexibility to allow for business growth or shifts in strategy.
A good retail attorney can help you find the sweet spot.
Retail businesses evolve, expand, and shift their offerings, and your lease should provide enough flexibility to accommodate these changes. With that in mind, a well-drafted permitted use clause will:
Be broad enough to support expansion: For example, if you operate a studio for spinning classes, but you want to expand to offer yoga and weightlifting classes, make sure the lease does not restrict that.
Consider seasonal or temporary changes: If you anticipate hosting pop-up shops, special events, or seasonal sales, make sure these uses are permitted under the lease.
Decide if you want a shared space: If your business might partner with another retailer or service provider in the future, confirm that co-leasing or subletting part of your space is allowed.
Carefully review restrictive use clauses: Clarify any activities or products that are specifically prohibited within the leased space or by the landlord.
Step 3: Check For Exclusive Use Clauses
Say you just opened your brand-new spin studio in a hip downtown area. Six months into your lease, the landlord enters into a lease with another spin studio just a few doors down from your business. Not ideal, right?
The solution is an exclusive use clause.
An exclusive use clause grants the tenant exclusive rights to sell certain products or services in the retail complex, preventing competitors from opening similar businesses next door.
In other words, the landlord can’t lease property to other businesses who may compete with your business (at least, they can’t do it without being penalized). When negotiating an exclusive use clause:
Be specific about what’s included: Define exactly what products or services are included under the exclusivity.
Negotiate hefty penalties: Include a penalty clause for the landlord if they violate the exclusivity agreement by leasing to a competitor.
Carefully monitor the competition: Be sure the contract states that the landlord agrees to notify you if they intend to lease space to another business with overlapping services or products.
Keep in mind that landlords often hold multiple properties in a geographic area, even if they’re not connected or in one building (like a mall). Don’t assume that just because your business is in a free-standing building that your landlord doesn't control those competing businesses, too.
Step 4: Don’t Ignore Common Area Maintenance (CAM) Charges
In retail settings such as shopping centers or strip malls, landlords often charge tenants for their share of the maintenance and upkeep of shared spaces, referred to as CAM charges.
These can include everything from cleaning and landscaping to security and repairs. These costs can quickly add up, and before you know it, your base rent is a lot higher than expected. For retail business owners, here’s what you can do to offset surprise CAM costs:
Understand the CAM calculation: The lease should clearly define how CAM charges are calculated and what expenses are included.
Set CAM caps or limits: Negotiate a cap on annual increases to prevent unexpected spikes in CAM charges.
Request transparency in charges: Insist on the right to review documentation and invoices related to CAM charges to verify their accuracy.
Step 5: Understand Responsibility for Repairs and Maintenance
One of the most common sources of conflict in commercial leases is determining who is responsible for repairs and maintenance. For retail tenants, unexpected maintenance costs eat into profit margins, so get clear about who is responsible for which aspects of the property.
Common Tenant Responsibilities
Tenants are usually responsible for maintaining the interior of the premises, including:
Lighting
Plumbing
Retail-specific improvements
Common Landlord Responsibilities
Landlords usually cover:
Structural repairs
Roofing
Exterior walls
Major systems like HVAC
Make sure the lease specifically outlines the responsibilities of both parties to avoid confusion. The last thing you want is a huge repair cost and responsibility to pay it!
Step 6: Negotiate Rent Escalation and Renewal Clauses
Retail businesses typically operate on thin profit margins, making rent increases a potential threat to long-term success. The solution is to negotiate terms that allow for stability.
Cap rent escalations: Negotiate a limit on how much the rent can increase each year or at renewal periods, whether through a fixed percentage or by linking the increase to a standard index like the Consumer Price Index (CPI).
Secure the option to renew: Secure the option to renew the lease at predetermined terms so that you have the flexibility to stay if your business thrives.
Step 7: Include Termination Clauses and Exit Strategies
Shifts in market demand, supply chain issues, or even location-related problems can cause unexpected chaos for retail owners. That’s why you’d be wise to include termination clauses in the lease that allow you to exit the agreement if necessary. You can think of this section as an exit strategy that ensures your business isn’t trapped in a lease that could become unsustainable.
Include early termination options.
Unfortunately, some retailers can’t find a steady flow of clientele in some locations. A “kick-out clause” allows you to terminate the lease early if your sales don’t meet a minimum threshold.
Include a force majeure clause.
Some things in life are simply out of our control. Include a force majeure clause that covers situations like natural disasters or other uncontrollable events that may make it impossible to continue operating in the space.
Negotiate subleasing rights.
You never know when you might need to scoot out of a space unexpectedly. Secure the right to sublease the space if your business needs to downsize or relocate.
Step 8: Have Insurance or Indemnity Provisions
The indemnity clause clearly outlines each party’s responsibility for damages or liabilities that may arise on the premises. Negotiate this carefully to prevent exposure to liabilities beyond your control and ensure mutual protection from claims.
Retail business owners should check that the lease requires the landlord to maintain proper property and liability insurance for the building while you, as the tenant, maintain coverage for your business operations.
Don’t risk it—check out the top 10 retail compliance risks all retail owners should know!
Step 9: Protection From Landlord’s Sale of Property
What if the landlord sells the property in the middle of the lease? To protect your retail business, include a non-disturbance clause in the lease. In other words, if the landlord sells the property or the property is foreclosed, the new owner must honor your lease terms.
Additionally, you can request a right of first refusal or right of first offer, giving you the option to purchase the property before it’s sold to someone else, thus maintaining control over your business location.
Step 10: Always Have Your Lawyer Review the Lease!
We saved the best–and most important–for last. Always consult with a skilled attorney before signing a commercial lease agreement. The last thing you want is to have to pay an attorney to engage in litigation to enforce the terms of a poorly-drafted lease agreement!
Commercial leases are complex and often include specific provisions that could be overlooked without legal expertise. A skilled attorney can identify red flags and will help you secure the best terms for your retail business, setting you up for long-term success.
Get Help With Your Commercial Retail Lease Today
Partnering with an experienced attorney to draft or review your lease is essential to ensuring that it provides adequate protection for your retail business and that the lease aligns with your business goals.
The Retail Law Group is here to help. We regularly partner with retail businesses to secure comprehensive and enforceable lease agreements that will protect your business and ensure your future success.
Book a consultation with us today and let’s keep your business on the path of success!