USA Law and Practice Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison Marzocco, Rosen Karol Salis PLLC
rise their terms here. However, three important issues are identified and discussed as follows. Length of Term 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 busi - nesses) 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 fran - chise agreement will commence 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/ten - ant if it chooses to sell its business and seeks to assign the lease to its buyer. Maintenance and Repair Commercial leases typically make tenants responsible for maintaining and repairing the leased premises, while landlords are responsi - ble 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 leases 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, fol - lowed by scheduled rent payments throughout the term (frequently, made annually). 6.5 Rent Variation The rent payable will rarely remain the same dur - ing 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 typ - ically contains a schedule of base rent due under the lease. As commercial 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 frequently 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, sometimes 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, in the event that the parties are unable to agree on the “fair market” rent, they will use a neutral mediator to help them reach an agree - ment, and that if the issue remains unresolved, an arbitrator with local real estate industry expe - rience will determine the “fair market” rent after reviewing both sides’ evidence.
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