USA Law and Practice Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison Marzocco, Rosen Karol Salis PLLC
of Time ), a tenant is permitted to develop a parcel of real property during the lease period, after which the land and all improvements are turned over to the property owner. 6.3 Regulation of Rents or Lease Terms Rents and lease terms in commercial leases in the USA are freely negotiated without regulation, unlike some residential leases, which may be subject to state or local regulation (such as “rent control” or “rent sta - bilisation” in New York City). During the COVID-19 pandemic, federal and state governments imple - mented eviction and foreclosure moratoria to protect tenants. COVID-19-related government regulations varied widely by jurisdiction (states) and between resi - dential and commercial tenants; however, most such regulations have expired as the pandemic subsided, although some court dockets relating to landlord-ten - As commercial leases in the USA may be 80 pages or even longer, it is difficult to summarise their terms here. However, three important issues are identified and discussed as follows. Length of Term ant disputes remain backlogged. 6.4 Typical Terms of a Lease Commercial leases often have terms of between five and 20 years. Although the term negotiated will vary based on the property type and class, its location and the landlord’s requirements, retail tenants (which are often franchised businesses) typically require an initial term of not less than ten years (as it is common for franchise agreements to have an initial term of ten years). Many franchises also include renewal provi - sions, so the franchisee (tenant) will also seek lease renewal terms to match. The authors seek to include a provision in the lease so that the term(s) of the lease and the terms(s) of the franchise agreement will com - mence and expire on the same day as each other. Commercial tenants have no right to renew the lease unless such a right is negotiated and reflected in the lease as an “option”. A franchisee’s (tenant’s) ability to secure one or more renewal lease terms also provides significant value to the franchisee/tenant if it chooses to sell its business and seeks to assign the lease to its buyer.
leases and ground leases. Absolute leases are long- term agreements where tenants pay all operational and maintenance costs related to the property, includ - ing structural maintenance and repairs. Gross leases, which are typically described as either “full-service” or “modified”, are primarily used for office or retail space. In a “full-service” gross lease, the tenant receives one invoice covering the base rent, utilities, insurance and tenant’s share of taxes and common area mainte - nance costs, and the landlord pays all such amounts to third parties, as necessary. A “modified” gross lease typically occupies the middle ground between a gross lease and a “triple net” lease, where the tenant pays base rent, utilities and a portion of operating costs. “Triple net” leases are long-term agreements where tenants pay most operational and maintenance expenses for commercial buildings, warehouses or industrial spaces. Landlords are typically responsible for external structural repairs. In a “double net” lease, the tenant typically pays the landlord the base rent together with the tenant’s pro rata share of real estate taxes and insurance, and the landlord is responsible for paying the costs of main - taining the building’s common areas and making structural repairs. In a “single net” lease or “net lease”, the tenant pays the landlord the base rent and the tenant’s pro rata share of real estate taxes, and the landlord is respon - sible for paying the various other building expenses and making structural repairs. In a “percentage” lease, which may be used for a retail business, the tenant pays a lower base rent plus a percentage of gross revenues earned at the demised premises. In a “variable lease”, the rent structure changes over time. For example, in an index lease, the base rent amount is tied to a particular “index” such as the Con - sumer Price Index, whereas in a “graduated lease” the base rent increases according to a predetermined schedule. In a ground lease (see 6.1 Types of Arrangements Allowing the Use of Real Estate for a Limited Period
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