A retail space lease agreement governs the landlord-tenant relationship between a property owner and a retail tenant. Retail tenants use their leased properties to operate businesses open to the public for the sale of goods or services. Most commercial landlords do not use standard forms. They have lease forms tailored to their needs and to the particular property. The forms used vary widely, but they contain common elements.
Retail and other commercial leases fall into two general categories--gross and triple net. Gross leases charge the tenant a gross fixed rent amount that includes property taxes, maintenance costs and insurance for the premises. Gross retail leases are rare. Triple net leases require the tenant to pay a fixed base rent amount plus the costs of property taxes, maintenance costs and insurance. Many retail leases also require tenants to pay percentage rent, which is calculated as a stated percentage of gross sales above a certain amount. Percentage rent provisions use either a natural breakpoint (the fixed annual rent amount divided by the percentage rate) or a negotiated artificial breakpoint.
Triple net leases contain provisions to pass through to the retail tenant all costs incurred by the landlord to operate and maintain the property (also known as common area maintenance costs, or CAM charges). Because the landlord provides the lease form, retail leases usually include a broad definition of CAM charges. Tenants and landlords often engage in heated negotiations over exclusions from CAM charges demanded by the tenant, such as capital expenses and the landlord's overhead and management expenses. CAM provisions may also contain caps on the amount charged to the tenant in the first year and on increases in subsequent years.
Term and Extensions
All leases specify an initial term. The commencement date for a retail lease is usually a certain number of days after the date on which the landlord delivers possession of the premises to the tenant in the condition required by the lease. If the tenant has negotiated a right to extend the term, the lease will also include one or more options to renew the lease for periods of one to five years each. Renewal provisions define how and when the tenant must give notice to exercise an extension option. They also contain a requirement that the tenant not be in default and other conditions to the tenant's right to renew. If the lease does not define a rent schedule for a renewal period, the renewal provision in the lease will state how the parties will determine the rent amount for the extension.
Landlords lease retail space in a variety of conditions, from as-is to turn key (meaning the landlord completely builds out the space to agreed-upon specifications so it is ready for the tenant's use). The lease allocates construction responsibility between the landlord and the tenant, sets procedures and landlord approval requirements for construction plans and states the amount of any tenant improvement allowance the landlord will pay to reimburse the tenant for construction costs.
Lease signage provisions allow the tenant to place signs in designated locations on the exterior of the leased premises, subject to complying with sign design requirements. Design requirements restrict the size, colour and type of signs used (e.g., neon signs are normally not allowed). Although landlords dictate some of the sign design requirements, retail leases also incorporate sign requirements under local law and any recorded deed restrictions applicable to the property.
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