As a tenant in commercial real estate, you need to be aware of the different kinds of tenancy, what they mean and how they affect you. By working with a commercial real estate attorney, you can be sure that you are entering into a commercial lease that benefits you.
Tenancy at will
This type of tenancy can be terminated at any time. It can be terminated by the tenant, owner or landlord. There is often no written lease or contract and no specification about how long the lease is or how rent is paid.
Generally, the tenant is legally permitted to remain on the property after the lease has expired but before the landlord demands the tenant to vacate. The original lease conditions must be met, including the rent payment. Otherwise, the tenant can be evicted at any time without notice.
The easiest and most beneficial for many tenants is a month-to-month rental. This lease does not tie the tenant down as a long-term lease often does. It allows for flexibility and is particularly favorable for a new business.
A holdover tenant remains in a property after the lease expires. If the tenant continues to pay rent and the landlord accepts, the tenant can continue to occupy the property. State laws and court rulings determine the length of the new rental term after the lease expires. This is common law and avoidable. Month-to-month is preferred, as it will not cost additional legal fees to determine the rental term.
At the end of your lease, you may have an option to extend the lease. This is a pre-negotiated agreement that allows the tenant to continue renting the property at a set rate and set term. The tenant and landlord agree on the option terms when the lease is signed.
Fair Market Value
Sometimes, the landlord and tenant can’t agree on the rental amount in an option, but they agree that the amount should be determined fairly. This is know as setting fair market value, and the method for the determination should be included in the lease. Some of the more popular methods are:
Two-Broker Method: The landlord uses a broker and the tenant uses a broker. The brokers determine the fair market value of the property and, that becomes the new rental amount.
Three-Broker Method: If the landlord and tenant brokers cannot make a decision, they bring in a third broker. The third, neutral broker determines the fair market value based on the information provided from each broker.
Option to Negotiate an Amendment
This isn’t a true option, but it’s an agreement that the landlord and tenant will extend the current lease, but negotiate the terms of the extension, not at lease execution, but sometime before the lease expires. Tenants need to be cautious- sometimes the landlord will require the tenant to agree to the rent before telling the tenant what the new rent is!
A commercial real estate attorney understands these tenancy terms in full and is familiar with working in each area. By partnering with an attorney, she will make sure that your lease works best for your particular needs. It is crucial that your tenancy be feasible. After all, it is a commitment, whether it’s 30 days or three years.
Call me today to discuss which type of tenancy is best for your business!
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