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Read further to learn more about commercial lease agreements in Arizona, such as what disclosures are required and what else should be included.
What is a Commercial Lease Agreement?
A commercial lease agreement is a legally binding contract between a landlord who owns a commercial property and a tenant who wishes to rent the commercial property with the intention to operate a business. The commercial property being rented generally falls into a retail, office or industrial space category.
A commercial lease in Arizona is a very important document for a business owner. The terms and conditions need to be carefully considered because moving an operating business from one location to another can be impactful on the success of the business. Also, landlords need to carefully check the backgrounds of potential tenants.
Sometimes moving to a better location will improve the business operations, if it brings more customers. In this case, the business owner will need to plan the move carefully. The timing of the move should be scheduled to occur at or near the lease termination date to avoid having to pay a significant amount to terminate a commercial lease early.
The opposite may happen as well. A successful business, operating in a great location, may be forced to move when the lease expires. Otherwise, the business may face an overwhelming rent increase that reduces the profits substantially. In such a circumstance, the business owner may feel like a hostage to the landlord’s demand for higher rent. Business owners prefer to avoid having to put up a sign that says Lost Our Lease – Everything Must Go. Negotiate renewal terms upfront to mitigate this risk.
Commercial Leases from the Tenant’s Point of View
Work with a competent attorney when preparing a commercial lease agreement. It is usually easier for a tenant to negotiate favorable terms during the initial agreement. Consider including a stated dollar amount as a penalty for early termination of a lease to allow a reasonable way out of the agreement. Alternatively, negotiate the inclusion of a sublease provision that allows a tenant to sublease the rental property to another party for the remaining lease term. Perhaps, have a renewal provision that limits the amount of rent increases to a percentage of the monthly lease payment amount, when the lease is renewed.
Commercial Leases from the Landlord’s Point of View
Have a competent attorney review the commercial lease agreement. If a sublease provision is included, insist on the landlord’s approval, not to be unreasonably withheld, of any sublease applicant. Having an agreement that includes stated rental increases for a lease renewal is not necessarily a negative thing. This may help make a tenant into a stable, long-term renter. It also makes predicting future cash flows easier while reducing the chance of having an extended vacancy.
Landlord’s Legally-Required Disclosures
There are a few legally-required disclosures under Arizona law regarding lead hazards, material facts, and regulations.
If the commercial rental space was built before 1978, a landlord is required to give a potential tenant a lead-based paint hazard disclosure, only if the use of the property may create a risk of lead exposure to children.
Under Arizona law, a landlord is required to disclose any material facts about the property, which may interfere with the normal commercial use of the property as intended. Even if a potential tenant does not inquire about a particular fact, if the fact is material, it should be disclosed.
To accomplish this disclosure, the landlord can add an addendum to the lease agreement stating the fact(s) and have the tenant sign the addendum that a notice was given to them about the fact(s).
Zoning, Restrictions, and Taxes
If there are any local zoning laws, use restrictions, taxation issues, or other regulatory requirements that affect the commercial rental property, these need to be disclosed in writing within the lease agreement.
Writing an Arizona Commercial Lease Agreement
Here is a step-by-step list of the items that need to be included in an Arizona commercial lease agreement:
- Step 1: Names and Contact Information of the Parties
Include the names and contact information of all the parties to the commercial lease agreement. Identify the landlord, property manager (if any), and the tenant (s).
- Step 2: Description of the Leased Premises
Include the physical address of the commercial space that is being leased along with a detailed description of it.
- Step 3: Use of the Leased Premises
This is a detailed description of how the tenant is permitted to use the premises. Include any use prohibitions and restrictions desired by the landlord.
- Step 4: Term of Lease
Include the start date of the lease and the end date. Include the number of years and months of the initial lease term.
- Step 5: Option to Renew
Include the renewal terms. State if renewals are allowed and for how long. Include the limits on rent increases, if any.
- Step 6: Lease Rate and Penalties
Include the monthly lease rate and what day of the month the payment is due. Include the address of where the lease payment is to be made and acceptable forms of payment. Include the numbers of days a lease payment may be late before a late penalty applies. Include the amount of the late penalty. Include the penalty for a check returned from a bank for insufficient funds.
- Step 7: Utilities, Taxes, Insurance, and Other Expenses
Commercial leases may be in one of three formats which are 1) gross lease; 2) modified-gross lease, and; 3) triple net (NNN). Under a gross lease, the landlord pays all the expenses. For a modified-gross lease, the landlord pays part of the expenses and the tenant pays part of them. Include a detailed list of expense items and note which ones (or portions thereof) are paid by the landlord or the tenant. For a triple net lease, the tenant pays all the expenses. The landlord may have certain minimum insurance requirements, which the tenant must carry.
- Step 8: Security Deposit
Include the amount of the security deposit and the procedures for how the security deposit will be refunded after the termination of the lease.
- Step 9: Leasehold Improvements
Include a detailed description of any improvements that the landlord agrees to make and to pay for. Include a detailed description of any leasehold improvements that the tenant will make and pay for. Identify who will be the owner of any leasehold improvements at the termination of the lease. Describe any responsibilities of the tenant to put the leased property back to its original condition, when the lease is terminated.
- Step 10: Default and Possession
Describe the procedure for a tenant’s default on the lease terms and for failure to pay the monthly lease payment on time. Describe the process, which the landlord will use to retake possession of the premises, in the case of a default by the tenant.
- Step 11: Miscellaneous Terms
Include any special terms that are needed for the particular circumstances of a lease agreement.
- Step 12: Notices
Include the contact information that will be used for the landlord and the tenant to give legal notices to each other.
- Step 13: Notices
Identify Arizona, and the county where the leased premises are located, as the place of proper jurisdiction and that the Arizona state law is the law governing the lease agreement.
- Step 14: Signature Section
Include a place for all the parties to sign and date the agreement. Require the signatures to be notarized if desired.