USA Law and Practice Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison Marzocco, Rosen Karol Salis PLLC
Maintenance and Repair Commercial leases typically make tenants responsi - ble for maintaining and repairing the leased premises, while landlords are responsible for making exterior and structural repairs. For multi-tenant properties, landlords usually maintain the common areas and then charge their tenants for the maintenance costs based on each tenant’s “proportionate share” of the rentable total square footage of the building. Frequency of Rent Payments Rent payments are generally paid on a monthly basis throughout the entire term of the lease, and they are usually due on the first day of each month. Most leas - es provide for the payment of late fees if the rent is not received by a certain date (ie, the fifth day of the month). Sometimes ground leases call for a significant “up-front” rent payment when the lease commences, followed by scheduled rent payments throughout the term (frequently, made annually). 6.5 Rent Variation The rent payable will rarely remain the same during the term of the lease. It will usually increase. 6.6 Determination of New Rent In commercial leases, base rent is negotiated prior to entering into the lease, and the lease typically contains a schedule of base rent due under the lease. As com - mercial leases usually have an initial term of between five and 20 years, it is common for rent increases to be implemented on a percentage basis (eg, between 3% and 5% of the then-applicable amount), and fre - quently on an annual and cumulative basis. If the lease provides for one or more options to renew, increases to the base rent are often negotiated in advance and set forth in the lease. However, some - times the landlord does not want to negotiate the new base rent for a renewal term (which may commence many years in the future) at the time that the lease is entered into, and requires that the new rent be “fair market” as determined prior to the effective date of the renewal period. Such lease provisions often pro - vide that, if the parties are unable to agree on the “fair market” rent, they will use a neutral mediator to help them reach an agreement, and that if the issue remains unresolved an arbitrator with local real estate
industry experience will determine the “fair market” rent after reviewing both sides’ evidence. Some leases utilise so-called “baseball arbitration” where the landlord and tenant each submit their evi - dence, which may include an “expert’s report”, and its “number” as to what the rent should be; the arbitrator selects one side’s number as the “fair market” rent, as opposed to awarding a “compromise” between the two proposed numbers. Utilising “baseball arbitration” incentivises the parties to be reasonable or risk losing the arbitration. The lease may authorise the arbitrator to award attorneys’ fees, expert fees and costs to the successful party in the arbitration. 6.7 Payment of VAT No states in the USA charge value-added tax (VAT) on rent. However, certain local jurisdictions impose sales or occupancy taxes on base rents, particularly if the lease exceeds a certain length of time. 6.8 Costs Payable by a Tenant at the Start of a Lease When signing a commercial lease, the tenant usually pays the landlord the first month’s rent and a security deposit. This deposit serves as “security” for the land - lord in case the tenant defaults on payments that are due under the lease or damages the property without repairing it. The deposit amount is usually negotiable, but not always, and it often ranges between two to six times the monthly base rent. The security provisions may be negotiated in various ways, so that (for exam - ple) the security could increase as rent increases over the term, or, conversely, the amount of the security could decrease as time passes. 6.9 Payment of Maintenance and Repair In many commercial leases, landlords maintain com - mon areas such as lobbies, parking lots (repairs, snow removal) and gardens (landscaping), and charge Com - mon Area Maintenance (CAM) fees to tenants, based on their proportional share of the total leasable space. However, some leases include these CAM expenses in the tenants’ base rent.
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