What is an Illinois Commercial Lease Agreement?
A commercial lease agreement in the state of Illinois is a legally binding document that is crucial to the relationship between a landlord and a business. It lays out the obligations of each party and ensures that when anything goes wrong or a disagreement arises between them, the terms of the lease will be used to settle the matter.
Commercial lease agreements can be somewhat distinct from residential lease agreements, as they are more often agreed upon by both parties ahead of time . While a residential lease typically has a term of either six months or a year, along with the same rent being paid every month, a commercial lease is much more flexible and can be negotiated for any variety of terms.
In addition to being more flexible, commercial leases tend to be longer than residential ones. Whereas a residential lease will typically be signed for one year, a commercial lease could be for several years (although it is still important to pay attention to how long the term of the lease is).
Key Components of an Illinois Commercial Lease
A commercial lease is a legally binding contract between a landlord and a tenant in the same way a residential lease is, but there are some necessary differences when it comes to a commercial lease. An experienced commercial Real Estate lawyer can help you negotiate the terms of a commercial lease that can be tens of thousands of dollars or more a month. The following are the key elements of a commercial lease:
Lease Term – The lease term is the period of time the tenant has the right to occupy the space. When a lease is coming up for renewal, the landlord may want to change the terms of the lease for the upcoming lease term. You will want to evaluate and understand those terms and negotiate those terms with your landlord.
Rent – The lease should state the rent amount and how it will be paid. In most cases, rent is due on the first of each month. The lease should also include a grace period for the tenant to pay rent. A grace period might be five days after the rent is due. In addition to base rent, the lease may include percentage rent, which requires the tenant to pay a portion of the gross sales.
Utilities – The lease should specify who will pay for utilities for the space. Utilities for commercial space can be significant, so it is important to discuss these charges before signing the lease. Some tenants are responsible for their own utilities, while some leases require the landlord to pay certain utilities. All of this can be negotiated by dialoging with your landlord and using an attorney to put your best terms in writing.
Security Deposit – Just like residential leases, commercial leases require a security deposit that is held by the landlord in case the tenant damages the property or fails to pay rent. The lease should spell out the amount of the deposit and under what circumstances it will be forfeited.
Maintenance and Repairs – The lease should specify who is responsible for maintenance and repairs. For instance, should the tenant be responsible for making repairs to the space and paying for any labor and materials? Or should the landlord be responsible for making repairs and paying for labor and materials? Repairs and maintenance should be discussed before signing the lease to make sure both parties agree on who is responsible.
An experienced Chicago commercial Real Estate attorney can help you negotiate and draft a lease that covers all the crucial terms.
Types of Commercial Leases in Illinois
Commercial leases in Illinois come in a variety of types, including the following:
Full-Service Lease
A full-service lease is one of the most sought-after types of commercial leases because it is easy to understand for landlords and tenants. Under the terms of a full-service lease, the landlord pays all operating costs, such as taxes, maintenance and insurance, and then incorporates those costs into the rent. The tenant is responsible only for the rent and utilities.
Net Lease
In a net lease, the landlord passes on some of building operating expenses to the tenant. The tenant pays a base annual rent (sometimes subject to increases) plus a share of certain expenses, such as property taxes, utilities or maintenance costs. As you can probably tell, there are many different variations of net leases. The following sections will describe each of them in depth.
Percentage Lease
A percentage lease calls for the tenant to pay a base annual rent in addition to a percentage of its gross sales. This is typical of retail leases where the store is hoping to make money through high sales volume. It is also somewhat similar to the graduated schedule of increasing rental payments that might be present in a residential lease.
The terms of percentage leases vary widely, but they are commonly written two ways. Under the first method, the landlord may replace the base rent with a percentage of the tenant’s gross sales. The landlord scans the market and determines the average percentage of gross sales paid in the tenant’s industry, and sets the rate accordingly.
The second method of percentage leasing explicitly defines what constitutes gross sales and what the business may deduct from it. If it is possible to label everything a business sells as gross sales, for example, items that are later returned could be deducted. Other commonly excluded items are breakage, markdowns and uncollectable accounts.
Mandatory Provisions & Tenant Rights
Illinois commercial leases are subject to the legal requirements imposed by the Illinois Commercial Code and the common law. Most of these obligations are either set out in the lease itself or can be inferred from the terms of the lease. But as is true across all 50 states, tenants and landlords can agree to new terms and conditions, which then take precedence over Illinois law if they do not violate provisions of the law that are in place to protect the public or have no exception for private law.
Like residential leases, Illinois commercial leases are required to contain a provision requiring landlords to maintain the property in a safe and habitable condition. Commercial leases commonly include many more provisions than do residential leases obligating a landlord to maintain the property. For instance, Illinois law requires landlords to repair water leaks, replace broken windows to protect against invasion, replace defective plumbing, maintain common areas, maintain elevators and fire escapes, and remove rodent and insect infestations. Commercial leases may also require that a landlord make repairs to the roof, the exterior walls and common areas of the property. No matter what specific provisions the lease contains, both residential and commercial landlords are obligated under Illinois law to supply safe and habitable housing.
Illinois law provides tenants with a number of rights that are unique to commercial leases. For instance, it is always within the tenant’s legal rights to sublease their space. Illinois law permits a tenant to sublet, or assign, its lease at any time, in whole or in part. This does not require the landlord’s consent, although the tenant is obligated by law to pay the rent due under the lease. When a lease prohibits subleasing or assignment, the tenant can still do so but is subject to a claim for damage should the landlord object. The landlord cannot refuse unreasonable requests to sublease or transfer.
In addition to the right to sublease, tenants have the right to terminate a commercial lease upon breach by the landlord of any material lease provision. Importantly, they must give the landlord 10 days’ notice after default before the termination is effective. Tenants may also terminate the lease without notice after a major breach. They may also terminate the lease after a minor breach if the lease permits early termination. Illinois law permits a landlord and tenant to negotiate such a provision. For instance, a tenant may first be required to give a specified notice before terminating the lease and be permitted to terminate it only some number of days later. Prior to termination, a tenant may also give the landlord notice of minor breaches and the landlord will have a specified number of days to correct the default before the tenant may terminate the lease.
Common Contract Provisions in Illinois Commercial Lease Agreements
Commercial lease agreements commonly include escalation clauses, renewal options and exclusivity clauses. Escalation clauses are provisions that allow for rent increases over the term of the lease. In addition to increases based upon the consumer price index or lease of comparably sized space within the same property, the most common form of rent increase may be annual percentage increase, in which case lease negotiations will focus on whether the increase will be based upon the "base year" or on whether it will be a compounding increase. The term "base year" indicates that the rent for the base year of the lease is established , but that future rents will be calculated based upon increases from the "base year" and not on the compounding cost of living increases.
Renewal options may grant a party the right to extend the term of the lease at either current rates or at fair market value. These options may be exercised pursuant to notice requirements, but are particularly valuable if the commercial space has appreciated in value. Exclusivity clauses may be used to protect a tenant from competition from other tenants. There is an express requirement that landlords must be willing to execute an exclusivity clause if they are willing to execute one for a competitor. Exclusivity clauses should expressly define the scope of exclusivity. For example, the scope of exclusivity may be limited to the particular type of business and not more generally applied to the industry as a whole.
How to Negotiate an Illinois Commercial Lease Agreement
While negotiating the terms of a commercial lease agreement in Illinois, it is important to be mindful of the points that are most likely to be up for discussion. Some of these points may be less important to your commercial landlord, so by understanding the issues you should attempt to negotiate in your favor, you can avoid creating an unnecessary adversarial tone between yourself and the landlord that could slow or even halt the finalization of the lease.
First, be prepared to discuss the duration of the lease. Longer leases are better for tenants, but they also raise risk for commercial landlords, as they will not be able to kick tenants out as easily if the lease agreement is for a period of, for example, five years or longer.
Secondly, be prepared to negotiate the rent itself. The goal of any landlord is to charge as much money as possible, while the goal of any tenant is to pay as little money as they can manage to give to the landlord. Compromise will generally be the name of the game when it comes to this important component of the lease.
Thirdly, consideration of tenants improvements and how they will be handled is a major point that often comes up during lease discussions. Tenants improvements are any alterations that are made to the property in order to accommodate your company’s business. In many cases, landlords make their tenants pay for improvements as part of the tenancy. Other landlords, however, may be willing to either partially or fully subsidize tenant improvements, or extend a financing option to tenants so they will not be responsible for frontrunning large amounts of cash to make changes to the property while they are still getting their business off the ground.
An experienced commercial lease attorney can help you negotiate on all these key points, so you have a lease agreement that works for your business, and can help provide you with the foundational foundation you need to succeed in your new location.
Common Steps to Creating and Finalizing a Lease
After the tenant and landlord have found a property, they will enter into the process of determining the terms of the commercial lease. While the parties may have reached a preliminary understanding, often in writing, six months or more prior to actually moving in, this understood agreement is not the final product. Negotiations will then move into drafting the final lease agreement.
A written lease agreement is the key to any commercial transaction. It is the last word on the business arrangement between the landlord and tenant. Simply put, without that lease, neither party has any binding obligations. Even if a portion of the deal has been honored by both sides, if the lease has not been prepared in accordance with the State’s statutory requirements, the true Terms and Conditions are not known. This is why legal counsel is so important to any commercial leasing transaction.
Even if both sides are familiar with the concepts involving a commercial lease agreement for properties in Illinois, they may still lack the expertise in the negotiation and drafting of the document itself. While the landlord may have leases he or she has used for years, it is important for both sides to come to an agreement whether there should be a comprehensive lease drafted or a quick form can be used. It may seem that a single page, nine-line agreement is sufficient, but a 25-30 page comprehensive lease may be what is needed in order to avoid future legal issues.
In the drafting of the document, the tenant can take advantage of his or her leverage to negotiate on issues that may have originally not even been considered. Not only can further issues be raised, but legal counsel can also be helpful in pushing for just compensation for the use of the space and the acceptance of any risks. In addition, the correct wording can be used to protect the tenant from legal action against sublessor and liable parties, e.g. parent corporations, affiliates, etc.
Commercial leases take many forms. While none are fool proof, having a comprehensive agreement that has been drafted by legal counsel can save both parties time and money.
Potential Issues and How to Prevent Them
As with many things in life, there can be potential pitfalls or pitfalls if the correct steps are not taken while negotiating or entering into a Commercial Lease Agreement. A new landlord negotiating the lease without the assistance of an attorney is subject to these pitfalls because commercial lease agreements usually have legal terminology and terms of art that are unfamiliar to the lay-person. Even those landlords familiar with leasing residential properties often overlook the more complicated nature of commercial leases. These rules and regulations also have penalties and particular drafts required of the lease. For instance, the Residential Landlord and Tenant Act governs most leases of residential apartments in Illinois. It tells the tenant what rights and duties the landlord has. In commercial leasing, each lease is totally different and subject to negotiation. You may see highly—with the risk of paying highly—modifications of the lease language. Having an attorney familiar with residential and commercial real estate leases is imperative to avoiding costly mistakes.
One major pitfall that you can avoid is not reading the fine print. It is very important for both the landlord and the tenant to closely review the entire lease carefully, as even a missed provision can result in expensive liability or loss of business revenue. For example, a commercial tenant that moves into a space only to find that the space lacks building code compliance will find itself at risk for material damages . In many cases, a change of use will necessitate a change in zoning, or making expensive improvements to the space prior to occupancy. A commercial tenant who does not fully understand the terms of the lease will also be subject to default for non-payment of rent when he or she fails to make a payment, or goes out of business and cannot pay rent while searching for a new location. If the tenant goes out of business and stops paying rent, it can be very difficult for that tenant to find financing to enter a new lease. The specter of the approaching lease end should prompt the tenant to make plans while business is still good to make the change in location, so that the tenant’s ability to pay for the lease will not be impaired. No matter whether the tenant goes out of business due to market conditions or just a poor business plan, the lease may require payment of the balance of the lease. Therefore, some advance planning by a tenant will save that tenant money while still retaining the ability to wait out the lease.
Landlords also suffer from forgetting to review the lease, forgetting the renewal period for the lease, or adding on provisions that are not required. A tenant that is overpaying rent may be entitled to a rent reduction if the lease contains a rent control provision. Keeping detailed notes of the renewal date on the calendar will allow the landlord to either raise rent or buy out the lease from the tenant, at which time the property can be leased to a better quality and more lucrative tenant.