What Is a Space Rental Agreement?
Space rental agreements are commercial property contracts that set out the terms of a lease between a landlord and a tenant. Their primary purpose is to document all the key aspects of the agreement with respect to the land and the object to be rented (e.g. a building) in order to avoid disputes from arising later and to provide the agreement in written form. A space rental agreement codifies the commercial relationship between two parties and minimizes the risks associated with renting commercial space and any property located on that space.
The inclusion of these terms in a space rental agreement permits the landlord and tenant to create certainty with respect to the rights and obligations of both parties, thereby providing them both protection. Again , these words of art are meant to be interchangeable with space rental agreement; the four documents are synonymous and can be used interchangeably. The legal words of art used will differ from location to location; they can also differ from industry to industry.
For example, in some jurisdictions, a "space rental lease" may appear to be a hybrid type of contractual agreement for renting class A commercial space, which is a premium class of office or retail space in a well maintained lower-rise mid-rise or high-rise buildings, meaning space rental may in fact be from a class B or C office building in a business area or an industrial zoned area. Likewise, in British Columbia, Canada, a standard space rental agreement for new or renewing residential tenancy agreements is called a "rental tenancy agreement". Other words of art include "space lease", "rental assessment", "lease", "lease agreement" or "tenancy agreement".
Key Elements of a Space Rental Agreement
The most basic element of a space rental agreement is a description of the space itself. What is being rented, where is it located on the premises, what size is it, and what condition is it in? Is the space furnished or unfurnished? In the case of a space that can be moved, such as a shipping container, it is important to describe how and when that container will be moved if purchased by the customer.
Another critical element of any space rental agreement is the duration of the rental, including the duration of any automatic renewal of the rental. Many times, the duration will be specified in the space rental agreement itself, but the agreement may permit the parties to revise the duration later.
Closely related to duration is the payment term, or when a periodic payment is due. Many agreements specify the term, such as quarterly or annually, and others fit the payment term into the daily life of the customer, requiring payment to be made on the first of each month.
All agreements require a termination clause, or the circumstances under which the agreement can be terminated early. Termination can occur by agreement of the parties at any time. Termination can also result from default, and the agreement will typically specify what constitutes a default. While such provisions are meant to protect the interests of both parties, the parties may limit the consequences of a default to the payment of some amount in lieu of what could be charged for actual damages.
A space rental agreement will almost always include a general description of what the space can be used for, and what uses are prohibited. Such restrictions may include prohibitions on subletting the space, restrictions on further improvement of the space, and restrictions on use of hazardous materials in the space.
Types of Spaces That May Be Covered
The scope of space rental agreements can be broader than merely the rental of physical facilities. While space rental agreements are frequently the subject of discussions about issues associated with the use of office buildings, manufacturing facilities, or warehouses, the concept of space rental is not limited to such physical spaces. From time to time individual or entities will rent a location for special functions or events, and these arrangements will also be space rental agreements. Venues for weddings, auctions, food festivals or other events may be standard form space rental agreements, frequently made under the banner of the facility owner and operator’s "event space" division. An annual weekend event may use the same space as the holiday party held in early December, but sometimes the office function is unrelated to the event.
Space rental agreements will also occur with respect to retail locations. Space may be rented for a weekend to sell items at a craft show or holiday bazaar. More infrequently, a retail location may be rented for the balance of the lease term, but in a fashion where the use does not displace the tenant. For example, a cooking school may need the use of a small space at odd times during the week to operate a demonstration kitchen. In such a case, the agreement under which the space is rented is a space rental agreement even if the use is only for a relatively brief period of time.
Of course, office space rentals are a primary example of space rentals, but the variation between what constitutes office space rental often makes the distinction unclear. For example, the use of a conference room at an office building may be a space rental agreement. A company that may have owned its own office buildings for decades may elect to use one of those locations for a business incubator and rent office space in the facility for startups that it backs. Such a transaction is really just a space rental agreement.
Often times the use of space under a space rental agreement will be for a short period of time, and the terms of the agreement are usually simple enough to expect any negotiation to last only a few hours. Nonetheless, significant costs can be involved with the use of space, sometimes justifying greater negotiation. But the longer the term of the agreement, the more negotiation that often occurs over a number of meetings.
Legal Requirements
Before renting out your property or space, it is important to consider how the law will protect your rights in the event of a legal disagreement. For this reason, it is always advised that you have a licensed real estate attorney draft or at least review your lease agreement. This is particularly true if you are allowing someone to live on the property, as tenant rights vary from state to state and are much more prevalent in tenant-favorable states like California, for example. There are many topics to consider. For example, how will you handle abandoned property? Will you allow sub-leases? What if your tenant damages the property? What states allow for pet injuries, and how do those injuries alter recovery amounts? We’ve previously covered some of these issues, and have broken down other legal concerns such as what’s involved in a force majeure clause and what the statute of limitations is for enforcing contracts. If a dispute happens to occur, having a solid written agreement can help the court favorably tilt the argument in your direction.
Tips for Negotiating a Space Rental Agreement
When negotiating a space rental agreement, the most important point to remember is to ensure that all essential points of negotiation are addressed, providing you as much flexibility and advantage as possible in the future. Some key areas to focus on include:
Lease term. Space rental agreements range in term from a few months to a year or more, and this could impact not only your ability to use that space but, if you are a business, how you’ll plan your finances and your growth in the future.
Security deposit. Space rental agreements tend to operate on a security deposit system, and it’s important to ensure the terms of that deposit are favorable and solvent. Such terms might include the amount of the deposit, what the deposit is for , what circumstances the owner can withhold it and whether it will gain interest over time.
Early termination. Analyze the penalties for early termination and inform yourself with regard to the local laws on this situation.
Rental increase. Find out what would trigger a rental increase, when it might occur and how much it would be. You’ll want to be able to plan for this expense well in advance.
Area modification. Can modifications be made to the space, and how will these changes affect your costs?
Use of spaces. If you’re a business, do the rental agreement terms allow you to use the space that is reserved for them? Do they have any restrictions on noise, music or smells that could potentially impact your business?
Common Mistakes to Avoid
Both landlords and tenants can easily overlook aspects of a space rental agreement that can lead to disputes and costly legal issues. Here are some common pitfalls to avoid:
For Landlords:
Not having a tenant finish the space to proper specifications: If, at the end of a tenancy, a landlord is supposed to hand back a space in "turn key condition" or "as-is," yet the tenant did not adhere to the finish specification or make the space available for the replacement tenant, the landlord could be on the hook, under the lease, to finish the space to the proper specifications and/or holdover over until the new tenant is otherwise in the space. Including these obligations in the lease up-front will help alleviate disputes later.
Not collecting a security deposit: If the space has been constructed to suit a tenants purposes, the tenant may have spent significant funds making changes to a space, and having a security deposit for the landlord to draw from may be a protection to ensure that the space is returned to the specifications outlined in the lease.
Having an expired or missing letter of intent to lease: If a tenant has stipulated any changes to a space, and does not have a binding lease, should there be a falling out, the tenant may be left without the right to occupy the space as they had planned. That said, if there is a binding lease, and the tenant has taken possession, if the tenant does not pay rent under the new terms of the tenancy the landlord is entitled to recover more money than they may have received had they entered into the agreement with the tenant previously stipulated in the letter of intent to lease (the landlord could have increased the monthly rent). Therefore, it may be in a landlord’s best interest to simply have a letter of intent to lease drafted between the parties to avoid such risk.
For Tenants:
Failing to get the work completed by the previous tenant prior to taking possession: If all renewals are exhausted, or otherwise have the choice to wait for the landlord to take action against the holdover tenant, or take the risk of stepping into the shoes of the tenant until the work is completed to the specifications under the lease, which may result in finding yourself waiting longer than necessary for possession of the space, which in some cases could be months.
Not having a lease assignment process: If you want to transfer your rights under a lease agreement to another party, you will usually need the consent of the landlord (or its management). If the landlord does not place a burdensome requirement on the assignment, then it is a good idea to negotiate the process with the landlord prior to signing a lease, otherwise the assignment could be held up, the lease could be breached and the tenant could be on the hook for damages to the landlord, notwithstanding the reason for the assignment (e.g., a failed business).
The Importance of Using a Broker or Attorney
Some space rental agreements are negotiated without an agent, but even with an agent handling the transaction, an attorney should still review the lease for you before signing it. It is important that the agent actually be involved in the negotiation process and not just the brokerage involved in arranging the transaction.
A Florida broker will usually have standard form agreements. The Florida Bar also has standard leases and other forms. However, there is no one size fits all lease. Every transaction is different and may need to be customized . Experienced brokers or attorneys know what items need to be dealt with, know terms that should not be included in the lease and know how to ensure that the intentions of the parties are correctly drafted in the lease.
In a more formal negotiation where both sides are represented by attorneys, each side will be presented with a draft of the lease, which should be reviewed by the attorney to provide comments to the other side. There should be some give and take to create a lease that is agreeable to both parties. In a simpler deal with an experienced broker, the process is usually much faster.