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Read further to learn more about commercial lease agreements in Kentucky, such as what disclosures are required and what else should be included.
What is a Commercial Lease Agreement?
When starting up a business on rental property, a commercial lease is required. This type of lease differs significantly from a residential lease, and it typically has to be much more all-encompassing so that a wider variety of situations are covered. It’s also worth noting that commercial leases tend to have much longer terms than fixed-term residential, so having ironclad coverage is much more important.
For the landlord, there are multiple advantages to renting a space to a commercial tenant. For one, commercial leases tend to be very stable, and since a standard commercial lease will last for multiple years, it can create a good income stream. Additionally, since there are multiple lease types for commercial leases, it’s also much easier for the landlord to find one that will be amenable to the needs of the building owner.
When it comes to these leases, as was mentioned, there are a few potential lease types to consider:
- The Triple-Net Lease: A triple net lease is designed so that the landlord has very little running costs when renting to a commercial tenant. With one of these, the tenant has more control and pays the rent, property taxes, insurance, and common area maintenance. The tenant will also be able to make decisions on things like the plumbing. In fact, a lease of this type emulates ownership for the renter.
- The Percentage Lease: For retail properties, the tenant pays a smaller rent but will provide the landlord with a percentage of the profit made. This can be safe for the tenant since it will cover them in times of financial leanness.
- The Gross Lease: A gross lease is effectively the opposite of a triple-net lease since the commercial tenant will only really be responsible for the rent – the insurance, maintenance, and property taxes will be paid by the owner. This can mean slightly higher rents.
- The Modified Gross Lease: When the lessee and the lessor agree upon which building expenses to pay, this is a modified gross lease. This can be advantageous for both parties dependent on the expense breakdown.
Required Disclosures for a Commercial Lease Agreement in Kentucky
In Kentucky, there are a few disclosures that must be followed for commercial leases:
Lead Paint Disclosure
If the property was built before 1978, the landlord must disclose to any tenant whether there is the presence of lead-based paint on the property. This is federal law and is required for interior paint. This is important because this type of paint is dangerous for young children and pregnant women.
Security Deposit Location
For clarity, based on Kentucky law, the landlord must disclose where the commercial tenant’s security deposit is being held. The landlord must also include the bank account number.
Based on Kentucky law §383.580, the landlord must walk through the property and note any defects that may be present before move-in. The tenant has the option to decline but must sign a waiver.
Additional Lease Considerations
When considering liability, a commercial lease is much different from a standard residential lease. For this reason, a few sections should be added for coverage:
- Subleasing Policies for the Property: Some tenants may want to sublease space on the commercial property. This can provide them with an additional revenue stream and is common on properties like gas stations. Kentucky permits subleasing, but if this is to be forbidden on the commercial property, it needs to state it clearly in the lease.
- Property Improvements and Maintenance: As time goes by, commercial businesses have a tendency to update their appearance or renovate the property. In many circumstances, this can be fairly extensive, so it’s critical that the landlord establishes any intended limitations in the body of the lease agreement.
- Material Storage: Businesses can store a wide variety of materials, but for the sake of liability, it’s a good idea to ban certain substances that can be dangerous. This can include certain chemicals, explosives, or any illegal drugs. This must be stated clearly in the lease.
Writing a Kentucky Commercial Lease Agreement
When writing one of these leases, here are some sections that will need to be included:
Party and Property Information
To start, it’s important to ensure that all of the required information for the lease is included. Typically, this means that the parties involved in the lease will need to be the first things that appear on the lease document. Unlike a residential lease where just the full names of the lessee and lessor will need to appear, the name of the business, as a legal entity, will also need to be featured at the start of the document. If there is a management company that runs the day-to-day operations of the building, the name of this company must also be included.
In addition, the property information should also be included. Typically, this will need to be the physical address of the unit including any side streets, counties, and zip codes.
Terms of the Lease
As mentioned previously, these leases tend to have a significantly longer term. For clarity, the complete lease term needs to be included somewhere in the document. Also, to avoid confusion, the renewal process should be included somewhere in the body of the lease as well.
While some lease types fold the utility costs into the rent, this is not the case for every commercial tenancy. Some of the standard utilities include things like water, electricity, phone bills, gas, or water, and the lease needs to be clear about which, if any, of these are being covered by the landlord. Sometimes, the landlord will pay the utilities and then bill each tenant for his or her share. If this is the case, then the lease needs to explicitly state this arrangement. Also, for those buildings with meters, the precise breakdown of each tenant’s share of the utility cost should be indicated.
Signatures and Notary
Since this is a business arrangement, the final document should be notarized, though this isn’t a law in the state of Kentucky. After notarization, both parties should sign their name, print it, and date the document.