The previous article, we discussed some of the differences between commercial and residential rental agreements in Oklahoma.
In this article, we will discuss the importance of having a written lease in your commercial rental property.
Commercial Leases determine the parties to the rental agreement
One of the primary reasons for having written leases in commercial real estate is to determine, and make clear, who the various parties to the lease are, and what, specifically, they are required to do. This may sound obvious, but in commercial deals, who is responsible for what is not always obvious.
Commercial properties often have many possible uses. As such, there may be many different entities involved. There may be contractors, franchise companies, sub-tenants or sub-lessees, investors, as well as the actual primary tenant. There may be a landlord, but also a financing company or a lender.
There may be a lot of conversations going about, about who is funding what, when the job will be completed, and when the storefront/restaurant/entertainment complex will have its grand opening.
The complexity of it all requires that a written lease exist, identifying the legal owner, the tenant, the terms of the arrangement, such as when the tenant will begin paying rent, and any Landlord concessions, or credits for build-out, etc.
Commercial Leases should explicitly state the terms and conditions
Commercial leases should clarify and memorialize all rights and obligations under the lease. The length of the lease, whether it can be renewed, and any and all rental increases will be identified.
In commercial leases, it is very common to have multi-year leases, but with annual rent increases. This is referred to as escalating rent.
As is the case with many commercial spaces, the space may need to be remodeled or repurposed prior to the Tenant operating its business. For example, if the space is a restaurant, it may need to be remodeled from a Mexican Restaurant to a Japanese Sushi bar.
During the remodeling, is the rent due? Or does the Landlord discount the rent? What is the period of time this is allowed and is there a deadline to complete the remodeling before the normal rent rate resumes? All of this questions would be answered in the lease. And all of these items would be the subject of negotiation during the drafting of the lease.
Another common subject is the issue of licensing. Most commercial tenants are required by their municipality to obtain an occupancy license, which is how most cities keep track of businesses within their jurisdictions.
Others businesses, however, may be required to obtain industry-specific licensing from the state. Examples would include liquor stores, restaurants and bars, marijuana dispensaries, and cannabis grow operations.
In these scenarios, the Tenant would need to have a valid and binding lease in order to apply for the license. However, the tenant cannot generate revenue until the license is granted. Therefore, the Tenant will want to negotiate a discounted rental rate until the license is granted, and business operations begin.
Also, the Tenant will want to negotiate a clause that allows cancelation of the lease if the License application is denied.
The commercial landlord, on the other hand, does not want to waste time being locked in a lease with a business that has no chance of obtaining the license. Therefore, both parties will work to negotiate a lease that balances these interests.
Commercial Leases will specify what happens if the Lease is breached
The issue of late fees, attorney fees, and liquidated damages will all be covered in the written lease.
If no written lease, then Oklahoma statutes control
In the event there is no written lease, then the parties, and the situation at hand, will be controlled by statutes. This could be good bad or indifferent. However, in some situations, it may substantially alter the rights and obligations of the parties.
For instance, in Oklahoma we have a statute that says in leases involving agricultural land (including wild land), rent is payable annually, and it is due at the end of the year.
That means that if you leased land, without a lease, you may not be able to enforce rent collection until the end of the year.
On the other hand, if there was a written lease, but it expired, the law states that it will renew for another year if the Landlord begins accepting rental payments after the expiration date. Therefore, the terms of the previously expired written lease will apply to the on-going tenancy.
Contact OKC’s Commercial Landlord Lawyer, Travis Charles Smith
Travis Charles Smith has been working for commercial property landlords and real estate investors since 2009. Travis has been involved in major disputes and litigation involving everything from asset receivership litigation to construction liens to Chapter 11 bankruptcy adversary proceedings.
Travis represents real estate investors in commercial property evictions, and in litigation over rent collection, lease disputes, and asset seizures.
Travis can help you do any of the following:
- Evict a commercial tenant,
- Sue to collect rents due,
- Enforce Landlord Liens against Tenant property, equipment or inventory
- Defend you against Mechanic’s Liens or contractor lawsuits
Travis is himself an experienced real estate investor, both in syndicated limited partnerships as well as in privately held portfolio.
Hire Travis Charles Smith to protect your assets and your cash flow. Call the office at (405) 724-8112 or send us an email.