Top 5 Industrial Lease Clauses Tenants Need to Know When Negotiating a Lease

Signing a commercial lease agreement may seem straightforward, but the implications of the fine print can have a significant impact on your years as a tenant. Don’t fall into the trap of thinking that just because you’re leasing (instead of buying), the stakes are low. Industrial lease clauses can be complicated, so it’s important to know what to look for before you sign on the dotted line.

Industrial real estate leases encompass a range of provisions, such as rent escalation, term options, additional costs, and even the way a property can be used (“use clause”). A lease agreement is a legally binding document, which means that a thorough understanding of the particulars is vital in order to stay out of sticky situations. Partnering with an experienced commercial real estate broker who can walk you through the specifics is one of the best ways to ensure a successful tenant situation as you commit to your next industrial lease.

How Are Industrial Lease Clauses Unique?

Commercial leasing is distinct from residential leasing in a number of ways. Overall, commercial leases are much more complex than residential leases. They’re also longer and less flexible, and they have fewer consumer protection laws.

A commercial lease is an agreement between a landlord and a business tenant, as opposed to a landlord and an individual. The many variables of commercial leases are an important reason to give careful attention to each clause. But the legal protections are perhaps an even greater reason. While residential leases are heavily protected, most states implement few limitations in the drafting of commercial leases. This gives landlords and tenants much more opportunity to negotiate their own terms, which can provide benefits and drawbacks for both parties.

When both tenant and landlord have a good understanding of the clauses and opportunities, they can negotiate a contract that suits them both. It’s advantageous for each one to have an experienced broker and/or real estate attorney on their side to make sure there are no unwelcome surprises down the road.

The Importance of Thoroughly Reviewing Your Lease

Since signing a commercial lease is a legal agreement, it comes with its own potential risks. It outlines the rules for how a tenant can use the property, financial obligations, and each party’s responsibilities for maintenance and repairs.

These specifications can have a negative impact if they’re not well understood. But as a tenant, if you have a good grasp on both your needs and the lease clauses, you can use them to your benefit. It’s important for both the landlord and the tenant to have a thorough grasp on the lease details so as to minimize everything from simple inconveniences to legal disputes down the road.

Commercial lease agreements aren’t one-size-fits-all, and they can usually be negotiated. By understanding the key lease clauses, both tenants and landlords can work out a deal that profits both parties.

5 Industrial Lease Clauses Tenants Need to Understand

For prospective tenants, here are 5 of the most important clauses you need to understand when negotiating an industrial lease.

1. Lease terms and renewal options
2. Rent escalation
3. Maintenance and repairs
4. Use clause and sublease option
5. Default and termination

1. Lease Term and Renewal Options

Typical commercial lease terms include a start and end date for occupancy. The amount of time outlined in the terms of the lease is a legally binding agreement that’s in effect regardless of the success of the business.

For industrial leases, a 3-5-year term is common, but some leases can be as long as 10 years. Make sure to carefully consider the needs of your business so that you can negotiate a lease length that will be beneficial for both parties.

In addition to the start and end date, the lease term clause can also include specifics such as:

• The type of lease. A gross/full-service lease, net lease, or modified gross lease are the most common options.
• Renewal options. This might include whether or not there is a renewal clause (giving the tenant the right to renew).
• Early termination. This specifies conditions in which the landlord or tenant can terminate the agreement before the term of the lease expires.

2. Rent Escalation

The rent escalation clause dictates how often the landlord is allowed to increase the rent and by how much. Rent escalation clauses protect the landlord from rising costs and inflation over the course of the lease.

Escalation clauses can be fixed increases (typically once or twice annually), percentage increases (increasing by a certain percent each year), market rent increases (based on the surrounding market), or CPI (Consumer Price Index) increases (tied to inflation rates).

Commercial lease negotiations can also differ between base rent and percentage rent. While base rent specifies a fixed monthly rate, percentage rent requires the tenant to pay a percentage of their gross sales in addition to a base rental rate.

As a tenant, you need to know how much you can expect the rent to rise over the course of your time in the building.

3. Maintenance and Repairs

In addition to regular rent payments, the tenant may be responsible for additional payments such as maintenance costs and repairs. While some lease terms leave these responsibilities to the landlord, others may defer this responsibility to the tenant. Or, the responsibilities may be split between both parties.

As a tenant, it’s important to be aware of who is responsible for maintenance and repairs, including ongoing utilities such as HVAC systems, as well as one-time repairs.

Some leases also grant a tenant improvement allowance. This financial incentive gives the tenant initial funds to make necessary changes to the building in order to suit the tenant’s needs.

4. Use Clause and Sublease Option

The use clause demonstrates the tenant’s rights in regards to what activities are permitted on the property. Business operations must align with local laws and regulations, so it’s important for both the landlord and tenant to be clear about how the property will be used. (For example: retail space, office space, and industrial space require significantly different activities.)

The use clause may mention zoning regulations, environmental regulations, and safety laws. It can also include details and requirements about everything from the type of products and services a business can offer to the quality kept of the leased premises or operations.

The use clause is also commonly associated with the sublease clause, which outlines whether or not the tenant has the right to sublease all or some of the rented space.

5. Default and Termination

Default and termination clauses are important to understand. While every tenant hopes for business to go according to plan, the truth is that unforeseen circumstances sometimes arise. A thorough grasp on these provisions can help the tenant minimize the risk of legal disputes or extravagant costs in the face of early termination.

Lease terms outline the penalties and fees that may go along with breaking the agreement before the end of the lease. Some leases may also include provisions that outline specific instances when a lease may be broken. If early lease termination is allowed, it might require a notice period or a financial sum.

On the tenant’s side, the lease agreement should also include the responsibilities of the landlord. Failure to maintain the property may be grounds for the tenant to be released from the agreement.

Get Expert Negotiation With Broker Brian Smith

In the Charlotte metro area, Brian Smith stands out with unmatched knowledge and expertise to guide your next real estate venture. With SIOR and CCIM designations, Brian helps business owners achieve a smooth transition into new lease agreements in industrial, office, and retail properties.

The greater Charlotte area is ripe with opportunities for both startups and established businesses. Brian’s expert negotiation skills play a crucial role in helping clients achieve favorable terms within each clause of the lease agreement.

Partner with Brian Smith to tap into the top opportunities in the commercial real estate market in and around Charlotte, NC. Get a free market report or contact Regent CRE today.