Essential Features in a Texas Commercial Lease
There are many different kinds of commercial leases in Texas. Your commercial lease agreement will depend largely on the type of property you are leasing and the type of business you own. However, most if not all commercial leases share some common elements:
Lease term. As noted above, the agreed-upon length of time the lease will exist is a basic element of a Texas commercial lease contract. The parties will almost always agree to specific start and end dates. Leases can be for a set number of months, such as a 12-month lease, or a specific number of years with renewal options. Many leases allow for rolling renewal options (often for one-year) where either party can choose to not renew the lease simply by giving notice by such-and-such date.
Rent. As with any real estate lease, Texas commercial leases include a provision specifying how much rent is due, when it is due, how it is to be paid, and what happens if it is not paid. Sometimes the landlord will grant a grace period, such as five days after the due date, but after that a late payment penalty will be charged . In all cases, the lease should include a description of an acceptable method of payment, such as by domestic check, or electronically through PayPal or another service. The lease should also specify the exact address to which rent should be sent, such as to the actual rental property or a different address.
Disclosures. Texas law requires commercial landlords to disclose any environmental hazards – such as asbestos or other uses of certain hazardous substances, and any "threatened" condemnations of any part of the leased property. Also, any property that has been marked with either a "Red" or "Yellow" Environmental Protection Agency (EPA) designation must be disclosed.
Occupancy. A basic element of any lease is, of course, the obligation to occupy the property during the term of the lease. Depending upon the terms of the lease, if the tenant is unable to occupy the property, it still must pay the full amount of rent that comes due even if not actually occupying the property.
Tenant and Landlord Rights and Duties
The rights and responsibilities of both parties continue to govern the relationship between landlord and tenant after the contract is formed. This holds true even if the lease itself does not include a specific provision covering the right or responsibility, though the Texas Property Code may give additional statutory rights to tenants beyond those specifically included in the contract. For example, under the Texas Property Code, tenants have the right to have working utilities at the premises. While this is a good sense provision, many landlords chose to not provide any utilities. The lease will still be enforceable against the landlord for failure to provide utilities. In addition to maintaining certain utilities, landlords are also required to comply with all governmental building and housing codes affecting the residential rental unit. In some instances landlords must also ensure that their tenants are aware of specific provisions of the law related to safety and discrimination. For example, if a residential lease contains a restrictive covenant (such as a provision requiring tenants to turn off the heat in the winter) a landlord has an affirmative duty to inform all tenants that such provisions are void under law.
The laws related to security deposits in Texas cover the duties of landlords in return of security deposits at the end of the lease as well as the process by which landlords can deduct from security deposits for damages. Landlords must also make an inventory of their apartment or house in order to charge for normal wear and tear. If your lease does not currently have an inventory of your property, you should ask your landlord to create one so that you do not pay for normal wear and tear on your residence. Tenants can choose to enforce their rights against their landlord if the landlord breaches the lease or fails to fulfill their duties. Tenants should deliver written notice of the breach and a chance for the landlord to cure it. If the breach is serious, such as the failure to make timely repairs, tenants can file suit for the repairs and related costs incurred to the tenant.
Landlords are protected by the duty of the tenant to pay rent by the day; this means that if a tenant does not properly vacate the premises by the end of their occupancy period, they may be charged rent for additional days. Tenants cannot "holdover" at the property, by taking action to stay beyond the end of their tenancy without the consent of the landlord. Once the tenant holding over is evicted, however, they are entitled to be compensated for the additional possession period.
Typical Provisions in a Texas Commercial Lease
Common clauses, or "boilerplate," appear in virtually all Texas commercial leases. These standard terms and conditions X are unique to each lease, even though clauses are often similar in leases for similar properties. Common clauses include "use" clause, "subletting" clause, and termination options.
The "use" clause is arguably the most important provision of a commercial lease. It defines how the tenant can use and occupy the property. Texas commercial leases strictly prohibit uses that are not expressly permitted. In the case of a dispute, the landlord’s position will most likely be that a particular use is not permitted under the lease, and the tenant’s position will no doubt be that its use is expressly permitted by the lease. A tenant should never assume it can do anything the landlord doesn’t complain about in writing, because "no harm no foul" is seldom an acceptable defense to a breach.
The "subletting" clause is another common provision that should be carefully reviewed PRIOR to executing a lease. A commercial lease may: prohibit subleases and assignments (an assignment occurs when all or part of the leased space is sold, transferred or "assigned" for valuable consideration (money, merchandise, services, etc.)); prohibit subletting or "sharing" (an oral or written agreement to share a portion of the space); or allow subletting only with the landlord’s prior written consent. Because a breach of a subletting clause is often considered a substantial breach of the lease, the consequences can be severe. Texas courts generally do not allow a party to terminate a lease for a technical breach unless the lease expressly provides for such an event. Thus, even the slightest violation of a subletting clause may entitle the landlord to terminate a lease. By contrast, following the above-referenced guidelines can substantially protect the landlord’s position.
Commercial leases also often include termination options in case a landlord wants to move high-profile tenants to an office that does not have customary features, such as windows. A landlord may intend to occupy the original high profile office and, at some point, vacate its other space at the end of the original lease term. As part of the bargain for making the desired space available to the tenant, the lease may include options in favor of the tenant to terminate the lease early. Texas law does not generally require a specific event or cause for the tenant exercising an option to terminate. Exercising the option to terminate may or may not be a good business decision, depending on the current market conditions. Thus, a careful review and understanding of option clauses can avoid drastically changing the parties’ original bargaining intent.
Texas Commercial Lease Negotiation
In Texas, a commercial lease will typically be governed by contract law. However, different from traditional landlord-tenant relationships, commercial lease negotiations in Texas involve a more complex exchange of considerations. There are several drafters of commercial leases used in Texas, including the Houston Bar Association and Texas Association of Realtors. As a practical matter, there are some common ground rules for negotiating commercial leases in Texas that must be considered, such as (i) a Texas lease is generally recognized as an absolute conveyance of real estate; (ii) until a Texas lease is signed by both parties, either party may withdraw from negotiations or modify the terms; and (iii) unless expressly required by law, lease agreements in Texas are not required to be in writing.
As previously mentioned, a commercial lease negotiated in Texas is a conveyance of real estate. As with any conveyance, Texas law recognizes the freedom to contract, but only so long as those contracts do not offend public policy under Texas law, or are not otherwise void or voidable. As a practical matter, the following tips will aid in negotiating a commercial lease in Texas.
As part of a commercial lease negotiation in Texas, landlords and tenants will often negotiate a limit on future rent increases. Such a limit on rent increases is commonly referred to as a "ceiling." Some areas where you may find a "ceiling" on rent increases include a shopping center and/or an office building. Generally, such a limit on rent increases would be expressed as a percentage over the previous year’s rent, or perhaps tied to some form of index or economic indicator. If one is not being offered, you should request a ceiling on future rent increases in Texas.
A tenant negotiating a commercial lease in Texas should also consider requesting that the landlord complete certain improvements to the premises prior to the commencement of rent. In many cases, this is a relatively straightforward negotiation, such as requesting that a particular room be carpeted. In other cases, such as a lease in a high-rise building, the improvements being requested can involve one or more major construction projects. In either case, the parties can negotiate the specific terms of the improvements that will be undertaken, as well as the desired timeframe for completion.
The primary benefit to negotiating an exclusivity clause in a commercial lease in Texas is that it prevents the landlord from leasing another unit in the same shopping center to a potential competitor. An example of exclusivity clause providing that, during the term of the lease, a landlord shall not lease to a restaurant tenant, or a grocery store tenant, or a tennis instructor tenant who provides a tennis school. From a practical matter, it may be difficult to find tenants who could meet the criteria of an exclusivity clause. If you are not already aware of a potential competitor, then having an exclusivity clause is likely better than not having an exclusivity clause.
Key Commercial Lease Legal Issues and Compliance
The legal considerations for commercial lease contracts in Texas are not only important, but can be complex. While the Texas Property Code does not provide as many specific regulations and requirements for commercial leases as it does for residential leases, there are still a number of relevant state and local ordinances that need to be considered. Some factors that may influence the legality of a lease include:
- Whether the property has access to appropriate basic utilities
- Whether the property has been appropriately zoned for its intended use
- Whether the lease conforms with property code requirements
- Whether the tenant has adequate insurance
- The scope of work performed by contractors hired to make any improvements to the property
Because compliance varies by area , working with an experienced commercial lease contract lawyer is highly recommended to ensure that all state and local regulations are being met.
In most situations, disputes or a breach of contract may be resolved through negotiation and mediation. The parties may agree to modify or terminate the current lease, or simply agree to seek guidance from a neutral third party to resolve the dispute. However, if both parties cannot agree, then litigation may be necessary to resolve the issue. A skilled commercial lease contract lawyer will be invaluable to help guide the discovery process, deposition, trial preparation and trial if necessary.
Tips for Examining a Commercial Lease Agreement
A good starting point when reviewing a commercial lease is to check for the lease terms that affect your business. Consider the following:
The Lease Term: The length of the lease is critical for business owners who desire a long-term presence in a commercial space. It’s also important to know the renewal terms.
Areas Affecting Your Business: For instance, if a roof or AC unit services your space, you may be responsible for maintaining and repairing it. This can add unexpected costs to your budget. Another example is additional property owned by the landlord that may be added to your rent, such as parking, storage, or landscaping.
Permitted Uses: Most landlords will want to limit the types of ventures allowed in the lease agreement, so it’s important to make sure it covers your business’ purpose. This section also often contains a "non-competition" clause which prevents the landlord from leasing space within the same commercial development to a competitor.
Access: Often in a lease agreement, it gives the landlord the right to enter the space, not only to show to another tenant, but also for repairs or maintenance. The key here is that you have a clear agreement in the schedule for the landlord to enter your space for those reasons.
Condition of the Property: Never sign a lease agreement before completing a walk-through (with camera) and ensuring the property is in the condition you’ve agreed to.
Indemnification Clause: Your landlord should carry liability insurance on the building itself, and you can get business-interruption insurance (i.e., rent protection coverage) to protect your business from lost profits. You don’t want to become liable for every hardship that befalls the building after you settle in.
Independently seek legal counsel during the lease review process to ensure all your bases are covered and that your business is well protected.
Texas Commercial Lease Resources
For those seeking further information about negotiating or drafting a Texas commercial lease, there are many resources available to tenants and landlords. Legal aid services may be able to assist you if you are a low-income tenant , while legal referral services can direct you to qualified attorneys in your area. Many real estate agents work with businesses when they are searching for a new location. The American Society of Testing and Materials publishes standards that are used in many leases to address issues such as the condition of the property, insurance, and construction. Finally, trade organizations are available to serve landlords and tenants by providing guidelines for the leasing and management of commercial properties.