The Essentials of Commercial Lease Agreements in Illinois

What Defines a Commercial Lease Agreement?

A commercial lease agreement is simply a legally binding contract that governs the terms under which a business entity may use and occupy a commercial space. The main purpose of a commercial lease agreement is to give a business the ability to occupy a space as a tenant rather than as a property owner. A commercial lease agreement typically has a term between three and five years to ensure adequate duration to amortize the cost of tenant improvements and other up-front costs.
A commercial lease agreement differs from a residential lease agreement in several important respects. First and foremost, commercial lease agreements typically allow for an increased level of flexibility from the landlord over how the tenant uses the space. Residential lease agreements are governed by Illinois law and local ordinances that prevent landlords from certain types of discrimination, require the landlord to keep the premises in safe and habitable condition and establishing a process by which tenants may claim a refund of their security deposit upon vacating the premises. None of these restrictions apply to commercial leases. Although some parts of Illinois condominium and landlord-tenant statutes apply to commercial leases, a large part of those statutes simply do not apply and are preempted by common law contract principles and commercial agreements .
For example, a significant amount of amortization can be gained through tenant improvements under a commercial lease agreement where the landlord leases the space "as-is" in its raw condition. In this scenario, the tenant usually designs the tenant improvements and either bears all of the costs or is reimbursed by the landlord on a pre-established basis with a set cap. For example, commercial landlords often agree to pay a certain dollar-per-square-foot allowance for tenant improvements but not more than a set percentage of the total cost of the work. Commercial lease agreements also allow landlords to recapture the value of tenant improvements based on the tenant’s depreciation schedule for income tax purposes if and when a lease is assigned to another tenant or the commercial unit is redeveloped.
The following are examples of common commercial leases in Illinois:
• Retail lease – A lease of commercial space in a shopping center or strip center.
• Office lease – A lease of a full or partial commercial floor in an office building.
• Restaurant lease – A lease of a commercial space constructed out for restaurant use.
• Industrial lease – A lease for commercial warehouse or manufacturing space.
• Parking lease – A lease for the use of a parking lot, garage or structure.
• Sublease – A lease from a tenant to another tenant for a partial term of the underlying lease.

Essential Components of a Commercial Lease Agreement in Illinois

Commercial leases in Illinois contain a number of key elements that are important for any landlord or tenant to understand. The primary purpose of a commercial lease agreement is to provide both the owner and tenant with a clear understanding of their rights and responsibilities regarding the use of the property. There are seven primary components of a commercial lease in Illinois:
As you would expect for such an important document, a commercial lease in Illinois can be very complex and includes many forms of writing beyond just the basic lease. It is not uncommon to see subleases added on top of the lease agreement, as well as a mutual rescission and release to end one lease and start another with the same property owner. Other common provisions include: exclusive use, returns policy, non-compete and option to renew. You will also find special provisions, such as e-commerce laws, that are specific to the internet and online sales on leased property.
Commercial leases have a lot of moving parts, so it is important that both parties pay close attention before executing any agreements. This is especially true where there are special provisions, such as less common clauses that landlords may attempt to squeeze into agreements to benefit themselves. Such clauses can include: environmental protection, tenants’ insurance, subordination and estoppel, notice and cure, cleanup, subordination, waiver of lien and no waiver.

Legal Standards for Commercial Leases in Illinois

In commercial real estate, lease agreements have long been influenced by the parties’ relative bargaining strengths. Because most commercial landlords (whether individuals or entities) own numerous properties, they can be expected to enforce similar terms throughout their portfolios, while tenants may have a difficult time modifying even one provision in a form lease. These relative bargaining strengths have historically made specific legal requirements governing commercial leases particularly important, and states such as Illinois and Texas, are unusual in the extent to which they require written terms to be included in commercial leases.
Specific legal requirements include the following: a rent concession during any state or federal bankruptcy proceedings, termination rights, tenant maintenance obligations, a listing of specific types of repairs and replacements for which the landlord is responsible (as well as for which the tenant is responsible, including whether maintenance of the entire property is subject to tenant reimbursement), a description of damage to premises for which the tenant is entitled to terminate, the period of initial and renewal terms, the amount of rent or bases for calculating rent for all terms, the extent of any rent concessions, and many other provisions. Any lease which does not include any of these provisions could be voided by the tenant in Illinois. This makes negotiating a commercial lease in Illinois, even on minor issues, particularly difficult, as is changing any part of a form lease. The landlord may take the position that an oral agreement has formed between the parties and that a provision has been added to the form lease. In Illinois, however, oral agreements would not be enforceable as the contract could not be "performed" within a year of its making.
In Illinois, most commercial leases must also contain a notice provision. Unless the lease provides otherwise, landlords must provide tenants a written copy of the law within 30 days of signing the contract and must attach, or send by certified mail, any notice of breach of contract to the tenant (no more than 10 notices per calendar year). Outside of the notice requirements, it is also required that any additional terms or conditions be contained within the lease document. Further, Illinois law requires commercial leases to be in writing with a specific description of the leased area in order to be enforceable (this includes the legal description of the property).

Negotiating the Terms of a Commercial Lease Agreement in Illinois

The commercial lease is a key component for a successful business venture. Because lease agreements are legally-binding, making the right decisions about signing the lease or negotiating terms can impact the value of your business. A competitive Illinois market with relatively low vacancy rates gives you more room for negotiating a favorable commercial lease.
One of the most obvious negotiations in a commercial lease is the monthly rent. As the tenant, you have an idea of what you can afford to spend per month, and you need to communicate this number to the landlord if it is lower than what the landlord is asking. Generally, the rent for a commercial location will be higher than rental units that are not used for business. The average commercial rent for a retail unit in Illinois is $19.24 per square foot. For offices the average is $23.59 per square foot, but for manufacturing/warehouse space it is only $6.32 per square foot. When you are negotiating with a landlord, make sure you know the average rent for this location so that you can make a case for why you should be paying less.
Another common objective of tenant negotiations is securing funds to make improvements to the space. Filling an empty space requires some upfront investment to take care of cleaning, touching up paint, replacing floors, or even renovations of bathrooms or adding cubicles. Your lease should include stipulations about who is responsible for such improvements. If you want the ability to make changes without approval from the landlord, you will need to negotiate this particular listing in the lease. If not, the lease should require that you ask for permission first, even for painting or small changes. You should also be able to negotiate funds from the landlord for improvements, if not in your monthly rent then through upfront payment in the lease. A closing cost assistance grant may also cover some of the expense.
There are many other components of a commercial lease that you might want to negotiate. Ground leases (leasing land to develop) should indicate whether you will or will not have the option to buy the property at some point. Retail space may require easements on parking lots that give preferred parking for certain customers at certain times. Be sure the lease states that you will receive early termination rights if necessary, which will protect you from losing money if you need to leave the premises when your lease is up, or requires 60 days written notice from the landlord to terminate the lease.
Commercial lease negotiations are never easy. Working out the details with your landlord can be time-consuming, especially if you are both professionals in the business aspects, but haven’t had much experience negotiating leases. Enlist the help of an experienced commercial real estate lawyer to get the best deal.

Common Issues with Commercial Leases in Illinois

Challenges in Illinois Commercial Leasing
When negotiating commercial leases, numerous challenges may arise for both landlords and tenants; this is especially true in Illinois. From contractual disputes to tenant rights, and even new laws, there are many important issues that may arise in an Illinois commercial lease.
Disputes between contractors and landlords are a few of the most common challenges that may arise during the leasing process. For example, if the site is a building, the contractor must be allowed reasonable and timely access to the building in order to make necessary repairs, or improvements. Yet, landlords often want a closure of the building or other access restrictions to ensure that the building is available to the tenant to carry on the business. The landlord will also want the tenant to provide reasonable advance notice of the need for major repairs so that the landlord can coordinate them with the tenant’s operations.
Other common disputes arise when it comes to maintenance and repair of the premises. In most commercial leases, the landlord will be required to maintain certain aspects of the property, such as common areas and major systems. But, landlords need to be careful that they are not taking on too much responsibility. For example, the landlord should not be responsible for "structure," because this can include anything from the floor slab to windows, unless the space is completely fitted out for a specific tenant and no structural changes to the space are permitted during the lease term. Instead , this can be negotiated to be the tenant’s obligation in the lease with the landlord providing a punch list for non-structural items. In addition, the parties should understand whether or not the tenant should bear expenses related to unforeseen contingencies, for example, if the electrical system is severely outdated and a total electrical upgrade is needed.
Landlords may also run into other challenges when it comes to changes in laws that affect the commercial lease itself. From zoning updates that require a business to obtain a special use permit, to an increase in minimum wage that affects costs, landlords should review all relevant laws before entering into the lease to determine if they would have any impact. Even the purchase or sale of the property may change the terms of the lease, or require an update. In addition, landlords should review the lease to determine whether a right of first refusal to purchase the center would be appropriate if the landlord becomes interested in selling the property. The parties may want to decide to add this right to the lease upfront.
A landlord may also run into market-related issues that affect the lease such as a downturn in the local, state, or national economy. If a tenant is financially strapped, they may cash flow struggle to meet their lease obligations. This will create problems for both parties; the tenant may need to renegotiate the lease and the landlord may end up restricting the use of the property to avoid future losses. The parties will want to define "economic downturn" in the lease, however, there may also be state disclosure requirements that apply to the lease, depending on the tenant’s industry.

Template for a Commercial Lease Agreement in Illinois

A typical commercial lease agreement in Illinois encompasses a range of crucial elements, often varying according to the nature and needs of the business involved, but generally retaining the following framework:
Premises
(a) This clause designates the specific premises or space within the commercial property, including its address, square footage, and any other relevant identifiers such as the lot or block number, which are critical for legal and administrative purposes.
Term
(b) This section clearly states the duration of the lease. It defines the start and end date, and whether there is a renewal option, for instance:
"THIS LEASE BEGINS ON THE ___________ AND WILL TERMINATE ON THE __________ AT 5:00 P.M."
Rent
(c) The schedule of rent or any other pre-agreed payments is outlined here, itemizing the amount, due date, and medium (whether online, physical payment, etc.).
Utilities
(d) Typically, this clause identifies who is responsible for utilities and which utilities will be paid for. While it might be too late for you to negotiate utilities on a lease that’s already been signed, it’s necessary to know what you may be responsible for before signing.
Alterations and Improvements
(e) When signing a commercial lease, you would likely be treated as if you’re the owner of the premises because of the commitment that once signed, your landlord cannot evict you simply because they want your property. To protect their interests in the absence of a "For Cause Termination" clause, landlords will typically insert a requirement for tenant repairs, alterations, and improvement obligations to hold you liable for expensive repairs and other issues, with the money due to them should you not fulfill your obligations.
Permitted Use
(f) This clause will restrict the type of business that can be conducted in the rented space. You will need permission to make any changes, however small, to the permitted use of the premises and/or the type of business being conducted.
Insurance
(g) This limits the insurance liability of the landlord. Otherwise, any fire, theft, or other damages or liability claims against the tenants would be the financial responsibility of the landlord.
Indemnification Clause
(h) Similar to the insurance clause, this limits the scope of liability against a third party that might file a lawsuit of some kind against you or your business.
Events of Default
(i) The events of default clause will define what counts as a breach of contract. Typically, "events of default" can range from failure to pay rent to doing work on the property without the permission of the landlord, as well as the failure of financial covenants.
Other Commercial Lease Agreements
(j) While the above list does cover most commercial leases you’ll sign, there are several other commercial leases worth mentioning:
• Commercial Space Lease: Covers all types of commercial properties, such as office space, retail stores, bars, restaurants, or manufacturing facilities.
• Commercial Ground Lease: Covers the land only or bare lots. A buyer will need to finance the building and/or improvements on the land.
• Commercial Office Lease: Covers office space only.
• Commercial Storefront Lease: Covers retail space only.
• Commercial Shopping Center Lease: Covers retail stores within shopping centers.

Closure Considerations for Illinois Landlords and Tenants

Finally, here are some additional tips that can help both landlords and tenants entering or in the course of a commercial lease agreement in Illinois:
Some extra tips for both landlords and tenants may be found below:
If you are the landlord:
If you are the tenant:
Both tenants and landlords should always strive to maintain a positive relationship even when lease issues arise. If you are the tenant and are struggling to pay the rent, discuss the issue openly with your landlord. If you are the landlord, be as flexible as possible if the tenant has a good payment history thus far.
This may be hard to do, especially if you are trying to keep good tenants , but it may the best decision for both parties when a lease term comes to an end. Often the choice can be made to simply not renew a lease if a tenant does not want to stay. In other cases, it may be that a renewal is not in the best interest of the landlord, possibly because they have plans to either move or no longer need the space.
Once again, put your wishes into writing and leave this section in the commercial lease as well. Issues may arise during the lease that the landlord wants to keep in order to protect their investment, so don’t try to muddle through these grey areas – just be extra clear in the contract.