For medical professionals starting their own practice, one of the largest expenses will be leasing a commercial space.  Signing a commercial lease can be daunting, as it can be 40 pages long (or more) and filled with difficult-to-understand terms, like Triple-Net (NNN), Common Area Maintenance (CAM), and Tenant Improvement (TI) Allowances.  You must understand the different parts of a commercial lease before you sign it.  The details are important.  You may or may not have escalating monthly payments.  You may or may not be personally liable for rent payments for five years or more, even if your business closes.  In this article, I will walk you through a commercial lease so you can have more informed conversations with your broker and real estate lawyer and better understand what you are signing. 

   

Commercial Leases

     As a tenant, I have reviewed and signed multiple commercial leases for our urgent care and family practice businesses over the past decade.  As a landlord, I manage both a single-tenant building and a multi-unit shopping center.  This allows me to understand what is important to each party in the transaction.  

          The first and most important item to understand about a commercial lease is that it is a legal, binding, and enforceable contract between a business (lessee) and a landlord (lessor).  You can and will be held responsible for the lease terms, regardless of whether or not your business succeeds.    

     Next, understand that everything is negotiable until you sign the lease.  You can attempt to modify any terms, conditions, or clauses you (or your lawyer) don’t like.  You can try to gain concessions from the landlord, such as free months of rent, a cap on any CAM increases, etc.  Like any negotiation, whether you are successful will depend on the relative strengths of your respective bargaining positions and your skill at haggling.  But once it is in writing and signed, you can’t change anything unless you both agree.     

     However, as a small business owner, commercial leases are typically provided by and written to protect the landlord.  While you can attempt to negotiate some language and terms, the entire document is slanted in the landlord’s favor.  This is not always true for large businesses wishing to lease commercial space, but you are a small medical practice, not Amazon.  Proceed with caution.  

     I will provide an outline of an actual commercial lease below in BLUE.  I will abbreviate some sections to save space (this lease is 43 pages long).  My comments and clarifications are in BLACK and embedded within the lease.  

Disclaimer

I am not a real estate professional, nor am I a lawyer.  This post is for educational purposes only.  You should work with a real estate lawyer before signing any commercial lease.  Also, I have modified this example lease for brevity and clarity.  It should not be used as a legal document.

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1.  LEASE SUMMARY

The lease summary will give you an overview of the important aspects of the lease.

Lease Date:

Date of Last Signature of Landlord and Tenant

This date is when the lease becomes valid as a contract.  It may or may not be the same as the commencement date of the lease.  

Tenant:
Address of Tenant:
Contact:

YOUR MEDICAL BUSINESS PLLC
555 5th St, Anytown, USA 99999
John Smith MD Telephone:  555-555-5555

Landlord:
Address of Landlord:
Contact:

BIG BUSINESS LLC
999 9th St, Anytown, USA 55555
Jane Smith Telephone:  999-999-9999

This section just outlines some basic information about the tenant and the landlord.  

Leased Premises

Suite X (approximately 3,000 Rentable Square Feet) of the Shopping Center situated in Any County, USA (the “Leased Premises”), as shown more fully as the space labeled in Exhibit A attached hereto . . . The term “Rentable Square Feet” will mean the ground floor square footage in the Leased Premises . . .  The Rentable Square Feet of the Shopping Center shall equal the sum of the Rentable Square Feet of all tenant space in the Shopping Center then constructed, whether or not leased from time to time, in each case excluding Common Area . . .

This is the space you are leasing.  Make sure the square feet listed is the same as you have discussed with the landlord, as this will be how your rent and NNN fees will be calculated.  The rentable square feet of your space and the rentable square feet of the building or shopping center (if you are leasing in a multi-tenant building) should be listed.  Note that the rentable square footage of the building is the total available space, not the total currently leased space.       

Term:

This Lease shall be in full force and effect upon full execution and delivery of the Lease by both parties.  The “Term” of this Lease shall commence on the “Rent Commencement Date” (as defined below) and shall continue for a period of sixty-four (64) months after the Rent Commencement Date plus any partial month from the Rent Commencement Date to the end of the month in which the Rent Commencement Date falls if the Rent Commencement Date does not occur on the first day of the month (the “Initial Term”).  For purposes of this Lease, the word “Term” shall mean the Initial Term and any Extension Term.

This is how long the lease runs.  The initial term can be any length of time but is often 5 or 10 years for medical practices.  Shorter terms give you more flexibility, while longer terms allow you to lock in a fixed rental rate.  If your business is not established, it is usually beneficial for the tenant to secure a shorter initial term since you will be responsible for the entire length of the lease, even if your business fails.  Other opportunities to negotiate a shorter lease term are when you are not receiving a TI (see below) if the leased space has been vacant for an extended period, or if you are subletting the property from another tenant.  In this case, the lease is for 64 months, or five years and four months, which will be further explained below.  

Extension Term(s):

Tenant shall have the option to extend the Initial Term for three (3) consecutive five (5) year period(s) (each an “Extension Term”) upon the same terms and conditions as contained in this Lease.  The Base Rent for each Extension Term shall be as set forth hereinbelow.  To exercise an extension option, Tenant shall give Landlord written notice (“Tenant’s Extension Notice”) at least one hundred twenty (120) days prior to the then-current Termination Date.  Tenant’s Extension Notice shall be effective to extend the Term without further documentation.

Extension terms are very important.  If your business is thriving at the end of your initial term, you do not want to be forced to leave the premises.  Without an extension, your landlord could lease your space to a competitor, take over the space themselves, or punitively increase your rent.  

In this lease, the tenant has the option to renew for three 5-year periods.  So, if the business does well, the tenant is guaranteed the space for a total of 20 years!  If the business doesn’t go well, the tenant can opt out of the lease after the initial 5-year term.  The Extension Term section references the base rent increases during these terms outlined below.  

Delivery Date:

The date Landlord delivers possession of the Leased Premises to Tenant in the condition required by Exhibit E attached hereto and incorporated by reference herein.

This is the date you receive the keys.  You can rent a space that has already been built out and is ready for your type of business, one that is not built out at all and has concrete floors, no interior walls, or anything in between.  In this example, Exhibit E will outline the condition at the time of delivery.  Occasionally, the landlord is responsible for your buildout.  If so, this is the date that you will receive the keys to the final product, the details of which will be outlined elsewhere in the lease.   

Rent Commencement Date:

Payments of Base Rent and Additional Rent under this Lease shall commence on March 1, 2024 (the “Rent Commencement Date”).  

This is the date you start paying rent according to the Monthly Base Rent schedule (below).  

Termination Date:

The last day of the sixty-fourth (64th) full calendar month following the Rent Commencement Date, subject to the terms of this Lease.

This date is especially important if you want to extend your lease.  For this example, you must notify the landlord in writing at least 120 days before this date if you wish to extend.

Monthly Base Rent:

MonthsRent Per Square FootMonthly Base Rent
1-4$0.00$0.00
5-64$20.00$5,000
Extension Term(s) (If applicable)
65-124$21.00$6,300
125-184$22.00$6,600
185-244$23.00$6,900

Base rent is the amount the tenant must pay in rent for the leased space.  This amount does not include “additional rent” (aka NNN charges), which are discussed in detail below.  Monthly base rent is calculated in terms of $ per square foot per YEAR.  So, if the landlord states that the base rent is $20/sq ft during negotiations, this refers to the yearly amount.  In this case, the space is 3,000 sq feet, and the base rent is $20/sq ft for the initial term or $60,000 per year.  The monthly base rent is, therefore, $5,000 per month.  

Note that for this lease, the tenant receives 4 months of free base rent and then must pay the monthly base rent for 60 months (5 years).  The 4 months of free base rent was negotiated as part of the lease as the space was not finished and needed a full buildout to be used as a medical clinic.  

This section also outlines the base rent increases if the tenant opts to extend the lease.  In this case, it is an increase of $1/sq ft/extension term.  In other cases, it may be a percentage of the $/sq ft amount.   

Additional Rent:

To be determined as set forth in the Lease, initially estimated to be $4.00 per Rentable Square Foot of the Leased Premises ($1,000 per month).  Tenant acknowledges and agrees that the foregoing amount is solely based on Landlord’s estimate of Additional Rent with respect to the Leased Premises.  If at any time during the Term, Landlord determines that its estimate of the Additional Rent requires adjustment, Landlord may provide Tenant with a revised estimate, but not more often than once per calendar year, and Tenant agrees to pay such revised amount.

Most commercial leases, including this example, are Triple-Net (NNN).  This refers to the base rent amount being net of building insurance, property taxes, and repairs.  Since most of us have rented an apartment at some point, the easiest way to understand a NNN lease is to contrast it with a residential apartment lease.  

     When you pay your rent each month in a residential lease, you expect the landlord to pay their property taxes and insurance from the amount they collect from you.  If you agree to pay $2,000 a month in rent for your apartment, the landlord can’t come back to you and ask you to pay their property taxes or insurance costs for the building.  Additionally, you expect the landlord to pay for any reasonable repairs within your apartment.  If your toilet stops working, you call the landlord, and they will have it repaired and pay for it.  Therefore, the $24,000 the apartment landlord collects from you each year is Gross Rent, and any expenses they incur for the items mentioned above will be paid out of the rent money.

     Conversely, an NNN lease ensures that the landlord will collect base rent money on a net basis.  The same $24,000 in yearly rent paid to the landlord will not be used to pay property taxes, insurance, or repairs.  The landlord will collect money separately from the base rent to cover these expenses, which is called “additional rent” or “NNN charges.”  

     In this example, the base rent is $5,000 per month, while the initial additional rent is estimated at $1,000 per month.  This is only an estimation.  If (when) the property taxes or insurance bills increase, the landlord will pass this along to the tenant at their prorated amount.  The third part of the triple net refers to Common Area Maintenance (CAM).  This is a catch-all category that will be further discussed below.  

   

Land and Building:

Lying and being situated in the City of Anytown, Any County, Any State, located on US Highway XX and consisting of improvements with a total of approximately 21,528 Rentable Square Feet (the “Building”) and located on that certain real property legally described on Exhibit B (the “Land”) (collectively, the “Shopping Center”).

Security Deposit:

None.

The security deposit can be anything from nothing to several months’ rent.  This is often negotiable.  

Tenant’s Proportionate

Share of Shopping Center:

14.0%

This is calculated by dividing the rentable square footage of the space the tenant is leasing by the total square footage of the building/shopping center.  If you are in a single-tenant building, this number would be 100%.  The percentage is important as the landlord will use it to calculate the amount the tenant will owe in NNN fees.  

Permitted Use:

The Tenant shall use the Leased Premises solely for the operation of a Family Practice Medical Office and related uses.

This section specifies what you can use the leased premises for.  These restrictions can be important if your business fails and you want to sublet the space.  It can also limit your business should you wish to expand into other services.  Additionally, it defines what your business is for purposes of exclusivity, which is discussed below.   

Exclusivity:

Other than any tenants, occupants or purchasers who have entered into leases or agreements prior to the date of this Lease, to which this protected use clause does not apply, and only so long as (i) Tenant is not in default under the Lease beyond any applicable notice and cure period, and (ii) Tenant is open for business to the public and operating in compliance with this Lease, Landlord shall not lease or sell space in the Shopping Center to another tenant or occupant whose use includes the Permitted Use (a “Competing Use”) without Tenant’s consent.  

If you do not want a competing medical practice next door to you, pay attention to the exclusivity clause.  This is where lawyers earn their money, as verbiage matters.  In this example, an Urgent Care clinic could open in the same shopping center.  If your FP office was open after hours and on weekends, this could interfere with your business.  You can negotiate the exact verbiage to ensure unwanted competition.  

Tenant Improvement Allowance:

To partially defray Tenant’s cost of performing Tenant’s Work, Landlord shall pay Tenant an amount (the “Tenant Improvement Allowance”) equal to $25 per Rentable Square Foot of the Leased Premises, to be used solely towards Tenant’s Work (defined below).  The amount shall be paid within thirty (30) days after the completion of Tenant’s Work and the satisfaction of all of the following requirements: (i) Tenant’s compliance with all requirements for Alterations set forth herein; (ii) completion of all improvements according to Tenant’s Plans, as approved by Landlord; (iii) all bills have been paid to Tenant’s contractors and any subcontractors and professionals, as evidenced by unconditional final lien waivers from all the foregoing; (iv) delivery of a certificate of occupancy for the Leased Premises; and (v) delivery of the Tenant Acceptance Letter to Landlord.

A commercial tenant improvement (TI) is an alteration, modification, or improvement to a commercial lease space that makes it suitable for a tenant’s occupancy, commonly called a buildout.  These improvements may be performed by the landlord or by a contractor hired by the tenant, which will be specified in the lease.  Not every lease space requires a buildout.    

A tenant improvement allowance (TI allowance) is a negotiated amount that the landlord will reimburse the tenant for improvements made.  This is negotiated on a $/sq ft basis and is only paid out after the completion of the renovation once certain conditions are met.  Not every lease contains a TI allowance, even if a buildout is required.  However, if the space you are leasing is an empty shell, it is in the landlord’s best interest to provide one.  

Your business should be able to depreciate any money spent on the buildout, less the TI.  Consult your accountant for details.  Keep in mind that the improvements ultimately belong to the landlord and the building.  Removable items such as furniture and electronics are not considered an improvement and are considered TI.    

Trade Name:

Tenant shall operate under the trade name Your Family Practice or such other name as is reasonably requested by Tenant.  

This clause protects the tenant if they change their business name and protects the landlord from a tenant using an unreasonable name, such as one containing an obscenity.  

2. GRANT

THIS STANDARD SHOPPING CENTER LEASE AGREEMENT (the “Lease”) is entered into by and between Landlord and Tenant, to be effective as of the Lease Date.  For purposes of this Lease, capitalized terms and variations thereof have the meanings specified herein or in Schedule 1.  In consideration of the rents, terms and covenants of this Lease, Landlord hereby leases demises and lets unto Tenant the Leased Premises, together with the non-exclusive right to use, in common with other tenants, the Common Areas of the Shopping Center. 

This is just legal language that gives the tenant the exclusive right to the leased space and the non-exclusive right to use common areas (parking lot, walkways, shared lobbies, etc.)

3. TERM  

(a) Term.  The Term of this Lease shall be as set forth in Section 1, above, commencing on the Rent Commencement Date and terminating on the Termination Date subject to the renewal rights, if any, set forth herein.

(b) Condition of Leased Premises.  Tenant acknowledges that, subject to Landlord’s satisfaction of its delivery of possession of the Leased Premises in the condition set forth in Exhibit E attached hereto, it accepts the Leased Premises as suitable for Tenant’s purposes and subject to all Encumbrances, ordinances, orders, directives, codes, permits, and other rules and regulations of all state, federal, municipal, or other agencies or bodies having jurisdiction with respect to the Shopping Center (collectively, the “Applicable Laws”).  TENANT WAIVES ANY IMPLIED WARRANTY THAT THE LEASED PREMISES ARE SUITABLE FOR TENANT’S INTENDED PURPOSES.  TENANT’S ACCEPTANCE OF THE LEASED PREMISES SHALL BE AN ACKNOWLEDGEMENT BY TENANT THAT IT HAS FULLY INSPECTED THE LEASED PREMISES AND, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, TENANT ACCEPTS THE LEASED PREMISES IN AN “AS IS, WHERE IS” CONDITION.  Tenant acknowledges that Landlord’s title to the Leased Premises is subject to the covenants, agreements, reservations, liens, easements, restrictions, use restrictions, and/or encumbrances of record and to those additional restrictions and governing documents that are described in Exhibit F hereto, as such may exist from time to time (collectively, the “Encumbrances”), and Tenant shall be responsible for complying with all Encumbrances during the Term.

Ensure that the space you are leasing is suitable for the needs of your business before you sign the lease agreement.  If the landlord has built out the space, make sure that it meets the conditions you have agreed upon with the landlord (in this case, as outlined in Exhibit E).  

IT IS A GOOD IDEA TO PAY SPECIAL ATTENTION TO ANY PART OF A LEGAL DOCUMENT IN ALL CAPITALS.  It is in all caps for a reason.    

Tenant acknowledges that Tenant has or will independently investigate and verify to Tenant’s satisfaction the extent of any limitations or nonconforming uses of the Leased Premises.  Tenant further acknowledges that Tenant is not relying upon any warranties or representations of Landlord concerning the permitted uses of the Leased Premises or with respect to any nonconforming uses of the improvements located on the Leased Premises.

Don’t rely on anything the landlord tells you about the permitted use of the property or any improvements that have previously been made.  For example, suppose you lease a space that has already been built out that doesn’t conform to Americans with Disabilities Act guidelines.  In that case, you may be forced to modify the space at your expense to comply.  Do your homework before you sign the lease.  

To the best of Landlord’s current actual knowledge, Landlord represents that Tenant’s Permitted Use of the Leased Premises is allowed by applicable zoning ordinance.  

You should not assume that the landlord knows the local zoning laws.  This statement protects the landlord should there be an issue.  You should verify with the city that the space you are leasing is zoned for the intended use of your business.  This can save you time, money, and headaches should there be a problem.  

(c) Tenant Improvements to be Made by Landlord.  Landlord, at Landlord’s sole cost and expense, shall perform the necessary improvements to deliver the Leased Premises to Tenant in accordance with Exhibit E attached hereto.

This section is only valid if the landlord is responsible for building out the tenant’s space or if the landlord will make changes before the lease begins.    

(d) Tenant Acceptance of Leased Premises.  Tenant acknowledges that none of Landlord, or its agents, employees or other representatives have made any representations or promises regarding construction, repairs, alterations, remodeling, or improvements to the Leased Premises unless such are expressly set forth in this Lease or any Exhibit hereto.  

You acknowledge that this agreement, specifically the referenced Exhibit, contains the entire agreement between you and the landlord.  No matter what the landlord tells you, hints at, or promises regarding changes to the space you are leasing, unless it is in writing, it is not valid.  

Tenant is solely responsible for applying for and obtaining a certificate of occupancy for the Leased Premises and will satisfy itself as to any restrictive covenants, Encumbrances and all Applicable Laws prior to commencement of any construction.  Tenant agrees that if its occupancy of the Leased Premises is delayed, this Lease shall nonetheless continue in full force and effect.  Adjustment of the Delivery Date and the Rent Commencement Date as above provided shall constitute full settlement of all claims by Tenant against Landlord by reason of any such delay in possession of the Leased Premises.  

You, not the landlord, must apply for and receive a certificate of occupancy from the city and satisfy any issues with the city before construction begins.  If the construction is delayed, the lease is still valid.  If the landlord is performing the construction and there are delays, your only remedy is for the landlord to push back the rent commencement date.

Tenant’s taking possession of the Leased Premises shall conclusively establish that the tenant improvements, if any, to be made by Landlord under the terms of this Lease have been completed in accordance with the plans and specifications therefor and that the Leased Premises are in good and satisfactory condition as of the date of Tenant’s possession, unless Tenant notifies Landlord in writing specifying any bona fide deficiencies after taking possession.  Landlord shall use reasonable diligence to repair promptly such items but Tenant shall have no claim for damages or rebate or abatement of Rent by reason thereof.  In conjunction with, or at any time after, the Rent Commencement Date, Tenant shall, upon demand, execute and deliver to Landlord a Tenant Acceptance Letter in the form of Exhibit G to acknowledge the items set forth therein.

If/When you take possession of the leased space, you acknowledge that any tenant improvement to be made by the landlord has been completed to your satisfaction unless you notify the landlord in writing specifying any deficiencies.  The landlord must make the repairs if they are reasonable, but the tenant has no claim for damages.  If the landlord asks, you must sign a letter (Exhibit G) saying they made the changes and you accept them.  

4. BASE RENT AND SECURITY DEPOSIT

(a) Base Rent.  Tenant agrees to pay to Landlord the Base Rent and Additional Rent as described in Section 1 of this Lease.  Payment of Base Rent and Additional Rent is subject to proration for partial months and to adjustment for early or delayed occupancy under the terms hereof.  Upon the date Tenant executes the Lease, the first month’s Base Rent and Additional Rent shall be payable to Landlord.  All subsequent payments of Base Rent shall be made to Landlord monthly, in advance, in lawful money of the United States of America at the address stated below.  All installments of Base Rent shall be due and payable on or before the first (1st) business day of each month during the Lease Term, provided that if the Rent Commencement Date shall be a date other than the first day of a calendar month, the monthly Base Rent and Additional Rent shall be pro-rated to the end of that calendar month, and all succeeding installments of Base Rent shall be payable on or before the first day of each succeeding calendar month pursuant to the Terms hereof.  Tenant covenants and agrees that the obligation of Tenant to pay Rent hereunder is an independent covenant, and that all Rent shall be paid without demand, offset, deduction, or abatement except as may otherwise be expressly provided for in the Lease.

Once you sign the lease, you must pay the 1st month’s Base Rent and Additional Rent.  All future payments must be paid in advance on or before the first business day of each month.  The first payment will be prorated if the commencement date is not the 1st day of a month.  You also agree that withholding rent is not an option, even if you have an issue with the landlord.  Rent payment is independent of any other part of the lease unless explicitly stated. 

 

(b) Security Deposit.  Intentionally omitted. 

It will be discussed here if you are required to provide a security deposit.  This lease does not require a security deposit.    

(c) Late Charge. 

  1. Tenant’s failure to pay Rent when due under this Lease may cause Landlord to incur unanticipated costs.  Therefore, if the monthly Base Rent payment is not received by Landlord on or before the tenth (10th) day of the month for which such Base Rent is due, or if any other Rent payment due Landlord by Tenant hereunder is not received by Landlord within ten (10) days of the due date, a service charge of five percent (5%) of the amount of the payment due to Landlord by Tenant shall be additionally due and payable by Tenant as an administrative charge for the excess efforts necessitated by such tardiness in payment.  Such service charge shall be cumulative of any other remedies Landlord may have for nonpayment of Rent and other sums payable under this Lease.  Further, if Tenant shall fail to pay any Rent when same is due and payable, such unpaid amount shall bear interest from the due date thereof to the date of remittance at the rate of the lesser of: (i) eighteen percent (18%) per annum, or (ii) the maximum rate allowed by law.  The parties agree that such late charge represents a fair and reasonable estimate of the cost Landlord will incur by reason of such late payment.

If you don’t pay by the 10th of the month or 10 days after the due date of any payment, you will incur a late fee (service charge) of 5% of the amount due.  You will also pay interest of 18% or the maximum amount allowed by law (whichever is lower).

  1. For each Tenant payment check to Landlord that is returned by a bank for any reason, Tenant shall pay both a Late Charge (if applicable) and a Returned Rent Charge (herein so called) of $35.00 or such higher amount as shall be customarily charged by Landlord’s bank at the time.  If any check given to Landlord by Tenant shall not be honored by the bank upon which it is drawn, Landlord, at its options, may require all payments made by Tenant to Landlord or over the remainder of the Term to be by certified check.

The returned check fee is $35 or whatever the landlord’s bank charges (whichever is higher).  If you write a check that bounces, the landlord can make you pay by certified check.

  1. All Late Charges and any Returned Check Charge shall then become Additional Rent and shall be due and payable immediately along with such other Base Rent, Additional Rent, or other Lease costs then in arrears.
  1. Money paid by Tenant to Landlord shall be applied to Tenant’s account in the following order: (1) to any unpaid Additional Rent, including, without limitation, Late Charges, Returned Check Charges, legal fees and/or court costs legally chargeable to Tenant and then (2) to unpaid Base Rent. 

This shows you how money collected by the landlord is applied to your charges.  So, if you don’t include a late fee that you owe, you end up owing Base Rent (not a late fee).  See above for charging interest on late payments.  

  1. Nothing herein contained shall be construed so as to compel Landlord to accept any payment of Base Rent, Additional Rent, or other Lease costs in arrears or Late Charge or Returned Check Charge should Landlord elect to apply its rights and remedies available under this Lease or at law or equity in the event of default hereunder by Tenant.  Landlord’s acceptance of Base Rent, Additional Rent, or other Lease costs in arrears or Late Charge or Returned Check Charge pursuant to this Clause shall not constitute a waiver of Landlord’s rights and remedies available under this Lease or at law or equity.

The landlord doesn’t have to accept your late payments if you default on the lease, even if you attempt to pay them.  They can just kick you out or follow other remedies available to them outlined in the lease.  

(d) Advance Payment Requirement.  If two (2) consecutive monthly Base Rent payments or any four (4) [in total, cumulative from the beginning of the Lease Term] monthly Base Rent payments during the Lease Term (or any renewal or extension thereof) are not received by Landlord within five (5) days of the due date, the Base Rent hereunder shall automatically become due and payable by Tenant in advance in quarterly installments equal to three (3) months’ Base Rent each.  Landlord shall notify Tenant of such change in the time for payment of Base Rent and, thereafter, the first of such quarterly Base Rent payments shall be due and payable on the first day of the next succeeding month and on the first day of every third (3rd) month thereafter.  This remedy shall be cumulative of any other remedies of Landlord under this Lease for nonpayment of Rent.

If you make two late payments in a row or four total during the lease, the landlord will require you to pay in advance in quarterly installments (three months at a time).

5. OPERATING EXPENSES

(a) “Operating Expenses” shall mean all of the following paid or payable by Landlord with respect to the Shopping Center or any portion thereof: (i) all federal, state and local sales, use, ad valorem, rental, value added, other taxes (other than Landlord’s income or franchise taxes), regular and special assessments and other governmental charges and any assessments , dues or other monetary charges required per the Encumbrances; (ii) all insurance premiums, including, without limitation, public liability, casualty, rental and property damage insurance; (iii) all of those costs that are directly incurred in the operation, maintenance, repair, and security, if any, of the Shopping Center, including, but not limited to, the cost of all utilities, building supplies, janitorial and cleaning services, maintenance (including, if any, maintenance to the Common Areas), repairs, operation costs, if any, of the Common Areas, parking lot maintenance (including, among other costs, those for lighting, repairing, paint striping and resurfacing), labor and employee benefit costs (including wages, salaries, and fees of all personnel engaged in the management, operation, maintenance, repair, and security of the Shopping Center); (iv) all other fees to manage, supervise, and administer the Shopping Center including, but not limited to, management or administrative fees and such fees as may be paid to a third party; (v) any parking charges, utility surcharges, or other costs levied, assessed, or imposed by, or at the direction of, or resulting from statutes or regulations, or interpretations thereof, promulgated by any governmental authority in connection with the use or occupancy of the Shopping Center or the parking facilities serving the Shopping Center; (vi) costs that reduce Operating Expenses or are required to meet any Applicable Laws (excluding capital expenditures); and (vii) accounting fees and legal fees.  For purposes of computing Tenant’s Proportionate Share of the Shopping Center for Operating Expenses, after the first full calendar year of the Term, the Controllable Operating Expenses (hereinafter defined) shall not increase by more than eight percent (8%) per year (determined non-cumulatively).  “Controllable Operating Expenses” shall mean those set forth in Section (iv) hereof.

This section outlines what operating expenses the landlord will pass along to the tenant as part of the “Additional Rent” or NNN charges.  All taxes associated with the building, excepting the landlord’s income or franchise taxes) are included.  All insurance premiums are included.  Finally, all other costs to maintain, clean, and repair the common areas are part of the CAM (common area maintenance) fees.  This includes maintenance of the parking lot, utility costs for the common areas, and external building lighting.  The landlord may also charge a management fee and may pass along accounting and legal expenses.  

The NNN contains controllable and uncontrollable operating expenses.  Expenses that the landlord cannot control include taxes and insurance.  No matter how much these expenses go up, they will be passed along to the building’s tenants without any cap.  Controllable expenses include maintenance, cleaning, and repairs of the common areas (CAM fees).  Per this section, the landlord cannot raise these expenses by more than 8% annually.   

(b) For each calendar year of the term of this Lease, Tenant shall pay to Landlord as “Additional Rent” hereunder Tenant’s Proportionate Share, as set forth in Section 1, of the Operating Expenses.  Notwithstanding the foregoing, if any use of the Leased Premises by Tenant causes an increase in insurance costs, Tenant shall pay as Additional Rent the entire amount of any such increase, as described in Section 11 below.

In a multi-tenant building, if a tenant does something that causes the landlord’s insurance to increase, this cost may be passed along directly to the responsible tenant and not collectively to all tenants.

(c) Along with the Base Rent, Tenant shall pay, monthly, one-twelfth of Tenant’s Additional Rent as estimated and adjusted from time to time by Landlord, during the term of this Lease.  Within one hundred twenty (120) days after the end of each calendar year during the Term of this Lease, Landlord shall submit a reconciliation statement to Tenant setting forth (A) the Additional Rent due from Tenant for the preceding calendar year, (B) the amount of Additional Rent paid by Tenant during such calendar year, and (C) the amount, if any, either overpaid or remaining due from Tenant to Landlord (“Reconciliation Statement”).  Within ten (10) days after receipt of such statement, Tenant shall remit to Landlord the amount said statement shows to be due from Tenant or, if Tenant has overpaid, Landlord shall credit the amount overpaid to the Additional Rent next due from Tenant or shall refund such excess to Tenant, whichever Tenant shall so direct. 

The Additional Rent the tenant pays monthly is just an estimate of the NNN fees.  Within 120 days after the calendar year ends, the landlord will provide a reconciliation statement to the tenant.  This will outline all the landlord’s actual costs during the previous year.  If the tenant paid too much, the landlord will send them a check.  If the tenant paid too little, they must pay the landlord the difference.  

The tenant must review the reconciliation statement.  Each lease is different, so you must ensure the rules are followed.  For example, if your CAM fees have an 8% annual cap, you want to make sure you aren’t paying more than that.  The landlord will often raise your monthly Additional Rent if the uncontrollable expenses (property taxes and/or insurance) have permanently increased.   

(d) For the calendar years in which this Lease commences and terminates, Tenant’s liability for the Additional Rent for such partial calendar years shall be subject to pro rata adjustment based upon the number of days of the term elapsing during such partial year.  Where the applicable charges are not available prior to the end of the term hereof, then the aforesaid adjustment shall be made between Landlord and Tenant after Landlord shall have received the charges for such period, it being specifically agreed that Landlord’s and Tenant’s obligations under this section shall survive the expiration of the term of this Lease.

The NNN charges will be prorated in the years the tenant begins and ends the lease.  At the termination of the lease, the tenant is still responsible for the reconciled end-of-year charges, even if the lease expires during the year.  For example, if the lease ends on June 30th, the tenant will have paid 6 months of Additional Rent when the lease terminates.  The landlord will still reconcile charges at the end of that year, and the tenant will be responsible for any additional money owed as a result of this reconciliation but will only owe 50% of the total NNN for that leased space (since they only occupied the space for ½ the year).      

(e) The failure of Landlord to exercise its rights hereunder to estimate Operating Expenses and require payment of same as Additional Rent or the failure of Landlord to submit a reconciliation statement as called for herein shall not constitute a waiver of such rights which rights may be exercised from time to time at Landlord’s discretion. 

If the landlord forgets or fails to send a reconciliation statement, it doesn’t relieve the tenant of the obligation to pay at a later date if the landlord does get around to doing it.  

(f) Tenant shall be responsible for insuring and paying all taxes upon Tenant’s equipment, inventory, machinery, goods, supplies, fixtures, Alterations (below defined) or other improvements, and other property located on the Leased Premises.

The tenant must have insurance on the buildout of the leased space (floors, walls, lights, etc.) and on the equipment and inventory used in their business.  The landlord’s insurance only covers the shell of the building and the external walls.  The tenant is responsible for ensuring everything in their space, even if the buildout was before they became tenants.  

(g) As long as the Tenant is not in uncured Default beyond any applicable cure period, the Landlord’s books and records pertaining to the calculation of Additional Rent and Operating Expenses for any calendar year within the Lease Term may be audited by an authorized representative of Tenant, at Tenant’s expense, at any time within one-hundred-twenty (120) days following Tenant’s receipt of the Reconciliation Statement for the year in which Tenant’s audit will apply; provided, however, that Tenant shall provide Landlord not less than thirty (30) days’ prior written notice of any such audit.  Prior to the commencement of such audit, Tenant shall cause its authorized representative to use commercially reasonable efforts to maintain all information contained in Landlord’s records in strict confidence.  Such audit shall be conducted during reasonable business hours at the Landlord’s office (or electronically), where the Landlord’s records are maintained.  If the Landlord’s calculation of the Operating Expenses was incorrect, then Tenant shall be entitled to a refund of any overpayment, or Tenant shall pay to Landlord the amount of any underpayment, as the case may be, within thirty (30) days.  If it is proven that the Operating Expenses were overstated by more than eight percent (8%), the Landlord agrees to reimburse Tenant for Tenant’s reasonable, actual, out-of-pocket expenses incurred in conducting Tenant’s audit.

The tenant (as long as they are not in default of the lease) can audit the landlord’s books regarding the calculation of the NNN expenses.  The tenant must request an audit within 120 days of receipt of the reconciliation statement, give 30 days’ notice of the audit, and pay for it themselves.  If the landlord has overcharged the tenant, they must pay back the money.  If they have overcharged the tenant by more than 8%, the landlord must pay the expenses incurred by the tenant during the audit.  

6. TENANT REPAIRS AND MAINTENANCE

(a) Tenant Maintenance Obligations.  Tenant, at Tenant’s sole expense, shall maintain all parts of the Leased Premises and their appurtenances (except those for which Landlord is expressly responsible pursuant to Section 7(a) of this Lease), including, without limitation the interior, plate glass, doors and tenant signage, in good, clean and sanitary condition.  Without limiting the generality of the foregoing, Tenant shall also be responsible for the maintenance, repair and replacement of all lighting, heating, air conditioning, plumbing and other electrical, mechanical and electromotive installation, equipment and fixtures located solely within or solely serving the Leased Premises and also include all utility repairs in ducts, conduits, pipes and wiring, and any sewer stoppage located solely within or solely serving the Leased Premises.

This section outlies what the tenant must maintain within the leased space.  Maintenance includes keeping the space clean and in good working order, including any tenant signage.  Maintenance also includes maintaining all the systems within the space (lighting, HVAC, plumbing, electrical, etc.).  This section refers to those systems within the physical leased space.  So, if a toilet gets stopped up and overflows, it is the tenant’s responsibility.  If the main sewer line to the building needs repair, it is the landlord’s responsibility.  There is usually a carve out for the actual HVAC (heating and air conditioning) units and plumbing outside the tenant’s space.  

(b) Tenant Repair Obligations.  Tenant shall not damage or disturb the integrity, structural integrity, or support of any wall, roof, or foundation of the Building.  Any damage to these areas caused by Tenant or Tenant’s Representatives shall be promptly repaired by Tenant at its sole cost and expense and in accordance with Landlord’s plans and specifications.  In the event that Tenant or Tenant’s Representatives is responsible in any way for voiding all or a portion of the warranty for the roof, Tenant shall, at its sole cost and expense, reinstate the voided warranty for the roof, if possible, and if not possible, shall be responsible for the cost of all repairs, maintenance, and replacement associated with the portion of the roof for which the warranty was voided.  At any time Tenant or Tenant’s Representatives desires to access the roof in any way, Tenant shall be required to obtain the prior written consent of Landlord and shall be required to use Landlord’s vendor for the warranty, if necessary.

Tenants cannot damage or modify the structural integrity of the building (external walls, roof, etc.), and if they do, they must make repairs to the landlord’s specifications.  If the damage the tenant causes voids the roof’s warranty, they are responsible for making repairs until the warranty is reinstated.  The tenant may not access the roof without prior written permission from the landlord.  

(c) Condition Upon Termination of Lease.  At the termination of this Lease, Tenant shall deliver the Leased Premises “broom clean” to Landlord in the same good order and condition as existed at the Rent Commencement Date of this Lease, ordinary wear, natural deterioration beyond the control of Tenant, and damage by fire, tornado or other casualty excepted.

At the termination of the lease, the tenant must return the leased space to the landlord in the same order and condition as they received it, less any natural wear and tear.  Broom Clean can be interpreted to mean:

  • Free of all personal items
  • Floors swept clean
  • No visible cracks, nail holes, or debris
  • Appliances and cabinets emptied
  • Not necessarily deep cleaned, but all surfaces should be swept, vacuumed, or wiped down.

(d) Tenant’s Service Contracts.  Tenant shall at its own cost and expense, enter into a regularly scheduled preventative maintenance contract with a maintenance contractor for servicing all heating, ventilation, and air-conditioning systems and equipment within, and any other equipment or machinery installed by Landlord in, or solely serving, the Leased Premises.  The maintenance contractor and service contract are subject to Landlord approval, which shall not be unreasonably withheld.  The service contract must include all services suggested by the equipment manufacturer within the operation/maintenance manual and must become effective (with a copy delivered to Landlord) within thirty (30) days of the Delivery Date.  If Tenant fails to enter into such service contract as required, Landlord shall have the right to do so on Tenant’s behalf, and Tenant agrees to pay Landlord the cost and expense of same upon demand, and such amount shall be considered Additional Rent.

The tenant must enter into a contract for regularly scheduled maintenance of the leased space’s HVAC equipment and provide a report to the landlord at each service date.  If the tenant fails to do this, the landlord can enter a maintenance contract and pass the cost along to the tenant as Additional Rent. 

HVAC units for commercial buildings can be very expensive (up to $30,000 or more).  The landlord is very concerned about their maintenance, as it is a major expense to repair/replace them.  With good maintenance, the useful life for these units is usually 15-20 years.  

(e) Tenant Negligence.  In addition to, and not in limitation of, the foregoing, it is expressly understood that Tenant shall repair and pay for all damage caused by Tenant; by Tenant’s employees, officers, directors, partners, agents, invitees, licensees, contractors, representatives, or those for whom Tenant is legally responsible (the “Tenant’s Representatives”) or by Tenant’s default hereunder.  

The tenant must repair and pay for any damage they cause.  This includes anyone working for them in their business or any contractor they hire.   

(f) Landlord Repair and Tenant Reimbursement.  If Landlord shall give Tenant written notice of defects or need for repairs for which Tenant is responsible under this Lease, and if Tenant shall fail to make same within ten (10) days of Landlord’s notification or such shorter or longer time as is reasonable if expedited repair is needed, Landlord shall have the option to cure said defect or repair, and Tenant shall pay to Landlord, as Additional Rent, all costs and expenses incurred on demand.

If the landlord notifies the tenant of defects or damage that needs repair (that the tenant caused), the tenant has 10 days (shorter or longer, depending upon reasonableness) to make the repair, or the landlord can make the repair and bill the tenant as Additional Rent.

The vague time frame allows for variance in how quickly the defect needs to be resolved.  Damage to the roof is more time-sensitive than minor damage to a wall.  A broken storefront window may cause security issues and must be addressed quickly.  

This concludes part one of Medical Business Basics: Commercial Leases.  Parts two and three of this series will be released shortly and linked here.  If you have any questions or comments, leave them in the comments below.  Don’t forget to subscribe to Business is the Best Medicine to receive future Medical Business Basics posts and other relevant content.  Thanks for reading.