What is a Commercial Lease Agreement?
A commercial lease agreement is an agreement between a landlord and a tenant, where a landlord agrees to give up the right to occupy property for a set amount of time after receiving payment in return. In Virginia, commercial lease agreements are formalized for space outside of residential properties. These agreements are often subject to less regulation than residential lease agreements . Commercial lease agreements are commonly signed to allow tenants to use or do business in a certain location for a specific period of time. Landlords retain the right to negotiate terms with their tenants, relying on their attorney for review and negotiation of a commercial lease to ensure that their rights are protected.
Essentials of a Virginia commercial Lease
A well-designed Virginia commercial lease outlines the essential elements of your tenancy and sets the terms for your business move into a commercial property. With so much as stake, it’s important that a prospective new tenant thoroughly reviews this contract, confirming the inclusion of a number of key provisions.
Lease Term: For how long will the space be held? What is the process for extending the lease?
Premises: What are the physical boundaries of the space being rented? How are they mapped out and pictured?
Rent: How much will we pay? How often? Through what method?
Premises Size: What is the building’s square footage? Are we being charged for areas of the building that are not accessible to tenants?
Prorated Rent: If part of the first month will be eaten by moving into the space on the 15th, will we have to pay full rent for the first month or a portion of it?
Property Taxes: Who is responsible for paying taxes?
Common Area Maintenance (CAM): Will we need to maintain common areas of the property? What will those areas include? Will we be billed for costs associated with maintaining these spaces?
Legislation Affecting Commercial Leases in Virginia
Virginia laws governing commercial lease agreements are codified under the Virginia Commercial Landlord and Tenant Act. It governs various facets of the commercial lease agreement, including duration, termination and renewal, rent, late payments, usually not in excess of five percent of the rent due plus late fees.
It also governs landlords’ access to the property, repairs and maintenance, estoppel certificates and the landlord’s lien for unpaid rent. Tenants in Virginia have the right to security deposits held in escrow, subject to reimbursement under certain circumstances and a prohibition against self-help evictions.
In the event of default, the lessor must provide the lessee with written notice, permitting 30 days to remedy and avoid termination. A lessor may terminate the lease unless the default has been cured. Virginia landlords may evict or otherwise dispossess a tenant for failure to pay rent or comply with the terms and conditions of the lease without a formal eviction. Landlords in Virginia may not self-help evictions.
Further, the Virginia Uniform Commercial Code governs priority and perfection of personal property lien rights. Personal property may be defective or out of date, having no value when the personal property of a lessee is discovered.
Negotiating the terms of a Commercial Lease in Virginia
A commercial landlord will often try to make the lease as favorable to them as possible. To this end, they will likely propose a lease that is pre-printed on their form or that is unilaterally prepared by their attorneys. Although a prospective tenant may not feel comfortable questioning the terms of the lease proposed by a powerful and established landlord, it is critical to carefully consider the agreement and take the time to negotiate all provisions of the lease.
Should a landlord be unwilling to negotiate, it is important that the tenant at the least consult a commercial landlord-tenant attorney to obtain an overview of the terms and highlights of the lease. Taking the time to understand the terms of the lease agreement can save a tenant considerable amounts of time and money down the road.
One very important component of negotiating a lease agreement is to understand the fees and operating costs that may be required in addition to rent. In many cases, landlords use these fees as a way to increase revenue from commercial tenants. It is critical to understand any additional fees that may be charged as well as how these fees are calculated. An evaluation of these fees will allow for a more holistic picture of the fees that will need to be paid as well as allow for more informed and advanced negotiating power.
As previously mentioned, it is important to consider negotiating all terms and provisions proposed by your landlord. Quite often, commercial leases are proposed without much consideration taken into account of the needs and desires of all parties involved in the negotiation. However, a lease agreement is a reciprocal agreement between the tenant and the landlord. Both parties need to benefit and accommodate to some degree. The power of negotiation can help ensure that the final product is a satisfactory one for all parties involved.
Commercial Lease Terms Most Commonly Seen in Virginia
In Virginia commercial lease agreements, you might find a variety of common provisions that address both parties’ expectations. For example, many commercial leases in the state will include a clause outlining the responsibilities for maintenance of the premises and who is responsible for certain repairs.
Maintenance or repair clauses often will stipulate that the landlord has a responsibility for repairs to structural features including the roof, walls, and foundations, while the tenant is responsible for the maintenance and repair of the premises itself.
Other typical provisions include a section relating to subleasing , which addresses whether or not the tenant has the right to sublease the property to another tenant and the process for them to do so. If the property is being subleased, such a clause may outline whether the guarantor of the lease is still held responsible if the subtenant does not satisfy their obligations under the lease.
Early termination can also be addressed in a provision. Often, you will find that the lease requires a buyer or lessor to provide the tenant or lessor a certain amount of notice before terminating the lease. Typically, commercial leases also include a provision that requires a payment of the remaining time on the lease as liquidated damages if the tenant does not follow the requirements of the provision and attempts to terminate the lease early.
Basics of Rent and Other Costs in a Virginia Commercial Lease
Rent is often the most significant issue for a tenant and the most important issue for a landlord. Lease agreements can provide for rent in many different forms, the most common being (1) "gross" rent, which means that all expenses are included in the base rent amount, (2) "net" rent, which means that the rent is stated on a base year or similar basis and the tenant is responsible for some or all of the expenses, and (3) "percentage" rent, which means that in addition to a base rent there is a percentage of gross sales that the tenant must pay.
"Net" rent is usually calculated with the inclusion of a base gain or "free" rent period of a few months and after a base "year" for expenses, if applicable. As with residential leases, there may be "tenant improvements" – that is, a buildout of the premises by the landlord to suit a particular tenant and/or use. The cost of the tenant improvements is usually amortized over the term of the lease (and may result in an increased "base" rental amount). Landlords are wisely reluctant to encapsulate a tenant improvement over a term that is shorter than the lease term itself because it would expose their investment in the tenant improvement to the risk of early termination of the lease.
In addition to any net rent, landlords often charge "CAM" fees to the tenants to pay for their share of expenses such as repairs and maintenance in common areas and utilities. There may be one or more extensions of the lease agreement for a specific purpose such as a renewal of the lease term or an extension of the term for a specific purpose such as a renewal of the lease or an extension of the term to facilitate a transaction perhaps involving, for example, a purchase of shares in the landlord.
Resolving Disputes in Commercial Leases
Disputes under commercial leases in Virginia can arise out of a number of circumstances – from the delivery of less than satisfactory work product by a contractor on space to the delivery of less than satisfactory performance of any of the terms of the lease. The most common of these, right now, involves the presence of an eminent domain case in, or affecting, the area involved in the project. Everything from a full taking to a taking by way of construction easement or partial taking by way of the ability of the Commonwealth to trespass onto the property to conduct environmental testing, can create disputes under a commercial lease.
While the parties to the lease have agreed to certain terms for the space, the value of that space can change depending upon outside influences. In those cases where an eviction or expiration of the termination lease is not an acceptable alternative to resolution of a dispute under the lease, outside options, such as mediation, arbitration and litigation, are available for resolution of the dispute.
Mediation is a form of alternative dispute resolution where the parties to a dispute come before a neutral, who has been selected to help lead the parties to a resolution of the dispute short of litigation. The mediator has no decision making power over the parties, but only leads the discussion and negotiation toward a realistic resolution of the parties’ dispute. The advantage of mediation is that it encourages the parties to resolve their dispute with a larger measure of control and creativity, than in the other methods of resolving disputes. Parties often craft solutions to the disputes, as they have the most vested interest in the outcome.
Arbitration is another form of alternative dispute resolution. Similar to mediation, the parties to the dispute agree to resolution of their dispute short of trial. Once the parties have selected their arbitrator, the parties present their own "case" to the arbitrator, as they would in a trial. The parties present evidence, make arguments and are subject to questioning by the arbitrator. The arbitrator receives the evidence presented in the arbitration hearing and issues a decision on the matter. While the parties have some choice over the issues being considered by the arbitrator, they do not have the same level of control over the ultimate decision of the issue as they do in mediation. Since the proceeding is considered binding arbitration, the parties have very limited appellate rights.
Litigation is the most efficient option for resolution of a dispute. The parties are bound by traditional rules of court, including the rules of evidence and can expect their discovery disputes to be governed by the federal and state rules of civil procedure. There is a more formal discussion, under the discovery permitted by the rules, of the issues involved with the parties and determination of the facts, which is often not able to be achieved during the period of consideration that is present in arbitration and mediation. The parties are also able to obtain a definitive ruling on the issues in dispute, which parties do not always receive during mediation and arbitration. This is particularly true in a matter involving an eminent domain case, as the issue of whether there is an effective date for valuation of the property can be determined, in addition to the precise value of the property damaged or taken by the Commonwealth.
The best alternative for resolution of a dispute under a commercial lease in Virginia depends upon the parties’ particular circumstances and willingness to draft a resolution in their dispute. The latter is true of both mediation and arbitration, but will not be the case in litigation, where the parties’ hands are tied by the decision that a judge rendered in favor of one party over the other.
Tips for Tenants and Landlords
Tenants:
Make sure you understand your lease agreement fully before signing. If you have any questions at all, be sure to have them answered. Some things to consider include your obligations to maintain and repair the premises, whether you are paying the "market rate" for your location, the duration of your lease, the costs of renewing your lease, and what your options are for conflicting lease provisions. Even if you have no experience negotiating a lease, work with your lawyer to ensure that your lease is as beneficial to you as possible. Having a good relationship with your landlord can save you a lot of trouble down the road.
Landlords:
You also should have a clear understanding of your tenant’s obligations under the lease agreement. Again , if you have any questions, ask! It can be a good idea for your more sophisticated tenants to pay their Rent directly to your lawyer or your CPA, thereby reducing instances of quoting a late check. You should advise your tenants that they need to provide evidence, insurance riders, etc. to your lawyer/cpa, and not you. Doing these trivial, but also significant, things will help you maintain a good relationship with your tenants and increase the likelihood that you will be collecting your Rent more.
