By Indhira Desangles
A commercial lease agreement is the legal instrument used by a business owner and tenant to define the rights and benefits of both parties. This document should be drafted by a specialist in the field, as it constitutes a legal resource that provides protection in case of modification or breach of contract. Therefore, it is important that it be clear and complete. It must be registered with a notary public.
It is important to note that each party has its own particular objectives and concerns inherent to the commercial operation.
For landlords, the primary concern is the property's appreciation over time. Therefore, to proceed with the rental agreement, they must pay close attention to the property's condition and the tenant's qualifications. They are also interested in attracting and retaining top-quality tenants, maintaining the property in excellent condition, transferring risk to the tenants through the contract clauses, and securing the right to repossess the property should the tenant default or go bankrupt.
The most common concerns of tenants are based on whether the premises meet their requirements, convenient location, length of stay, size, space distribution, ease of access for their employees via public transport, parking, proximity to suppliers and customers, costs of renovations, moving, improvements, as well as the amenities they will have nearby such as malls, supermarkets, banks, shops, universities, housing, gyms, among others.
Tenant concerns vary depending on the type of property, but they are very similar regardless of whether it is commercial, office, industrial, or apartment, and are comparable regardless of size. It is precisely these concerns that are consolidated into an agreement between the parties to negotiate clauses that provide security for both sides.
What are the essential clauses in every commercial lease agreement?
It is essential that the complete details of the owner, tenant and guarantor are included, along with a description of the property, the amount to be paid to the owner for rent, and all expenses and responsibilities of the parties.
There are clauses that might seem obvious, such as stating that the space is in optimal condition for renting; however, it is the tenant who must state that this is the case, as will be established in the contract.
Rights granted where the rights of the owner and the tenant are defined.
The owner grants the right of possession to the tenant and the latter pays rent; thanks to this contractual instrument, all differences that could arise during the life of the agreement are foreseen and remedied.
Its complexity varies according to the requirements and needs of both parties and could usually be 2-50 pages.
Rental types:
Absolute Net Lease: The tenant pays all or part of the operating expenses.
Hybrid Lease: both parties pay their operating expenses.
Indexed rent: Calculates rent increases tied proportionally to a pre-established indicator, usually the Consumer Price Index or CPI.
Fixed rent: Fixed rent for the duration of the contract. No increases. Usually expressed in pesos per square meter.
Step lease: With staggered increases over the years, related to taxes, insurance, utilities, operation, and maintenance of the property.
Absolute Gross Lease: The landlord pays their operating expenses and maintains the property. The tenant pays a lump sum monthly to the landlord, who in turn pays taxes, insurance, maintenance, utilities, cleaning, and security. A fixed price per square meter is charged separately from the rent.
Common Area Maintenance Charges (CAM): This applies to shopping centers and multi-tenant premises and includes the maintenance of common areas such as lobby, hallways, elevators, stairs, basements, parking lots, among others.
Tenant improvements: This is an economic provision where landlords grant tenants the means to undertake renovations and remodeling of walls, floors, ceilings, electrical wiring, bathrooms, according to the tenant's needs and requirements.
Renewal : The right or not to renew the rental agreement and under what conditions, such as percentage price increases.
Expansion: The right to occupy/rent more space, if available. This option can even be added to existing rental spaces, such as adjacent units within the building, for a specific period, at market prices or predefined rates.
Early termination: This is a review clause that allows the tenant to terminate the agreement early, specifying the date and cost if its execution is necessary.
Retail rent percentage: This is an additional percentage of rent above the base rent paid to retail tenants, based on annual sales. It must be paid to the owner or the entity that manages and promotes the shopping center.
Common concessions include grace periods or free rent for a certain time
Reduced rent and parking included, or free extras or included upgrades
It is essential that these clauses be included in the contract that the parties will sign, as this makes it impossible to circumvent any prior agreement and avoids future problems due to misinterpretations or unforeseen information.
