North Dakota Commercial Lease Agreement

1. Introduction

A North Dakota commercial lease agreement is a legally binding contract that establishes the terms and conditions governing the rental of commercial property between a landlord (lessor) and a tenant (lessee). This agreement permits the tenant to occupy and use the landlord's commercial property for business purposes in exchange for rent and other considerations.

Commercial leases in North Dakota are primarily governed by contract law, with fewer statutory protections than residential leases. The North Dakota Century Code provides the general framework for landlord-tenant relationships in Chapter 47-16 ^[1], while eviction procedures are addressed in Chapter 47-32 ^[2].

Unlike residential leases, commercial lease terms are largely determined by negotiation between the parties. North Dakota does not impose statutory limits on commercial security deposits, late fees, or rent increases, making the written lease agreement the primary source of rights and obligations for both parties.

Required Disclosures

Agency Relationship Disclosure

When a real estate licensee is involved in a commercial lease transaction, North Dakota Administrative Code Section 70-02-03-15 ^[3] requires the disclosure of the agency relationship to all parties before a written contractual agreement is signed.

Key Requirements:

• The disclosure must be in writing
• Must be provided before signing the lease agreement
• Must state whether the licensee represents the buyer/tenant or seller/landlord
• Applies specifically to commercial leaseholds and commercial property transactions

Types of Commercial Lease Structures

Commercial leases typically fall into three main categories based on how operating expenses are allocated between the landlord and tenant:

Triple Net Lease (Nnn)

In a Triple Net Lease, the tenant pays the base rent plus all operating expenses, including:

• Property taxes
• Property insurance
• Common area maintenance (CAM)
• HVAC maintenance and repairs
• Landscaping and parking lot maintenance

Best for: Landlords seeking predictable income with minimal management responsibilities; tenants with strong negotiating positions who want control over property expenses.

Gross Lease (full-Service Lease)

In a Gross Lease, the tenant pays a single, fixed rent amount, and the landlord is responsible for all operating expenses. This provides the tenant with predictable monthly costs but typically results in higher base rent.

Landlord responsibilities typically include:

• Exterior structure maintenance
• Major systems (heating, plumbing, electrical)
• Parking area maintenance and snow removal
• Casualty insurance for fire and extended coverage

Best for: Tenants who prefer budget certainty; smaller spaces in multi-tenant buildings.

Modified Gross Lease

A Modified Gross Lease is a hybrid approach where expenses are split between the landlord and tenant as negotiated. The lease should clearly specify which expenses each party is responsible for.

Common arrangements include:

• Tenant pays utilities; landlord pays taxes and insurance
• Base year expenses included in rent; increases passed to tenant
• Tenant pays interior maintenance; landlord pays structural repairs

Essential Lease Terms

Parties and Premises

The lease must clearly identify:

• Full legal names of landlord and tenant
• Mailing addresses for both parties
• Complete street address of the premises
• Square footage of leased space
• Type of space (retail, office, industrial, etc.)
• Any additional description or suite numbers

Permitted Use

The lease should specify the permitted use of the premises. Options include:

• All purposes legal under law
• Specific designated purposes (e.g., 'retail sales of sporting goods')

Lease Term

The lease term should specify:

• Duration (e.g., '3 years', '60 months')
• Commencement date
• Expiration date (typically at midnight on the specified date)
• Any renewal options (see Section 8)

Rent and Payment Terms

Base Rent

The lease should clearly state:

• Monthly rent amount
• Due date for each payment (e.g., 'the 1st day of each month')
• Acceptable payment methods
• Where rent should be sent or paid

Percentage Rent (if Applicable)

Common in retail leases, percentage rent is an additional payment based on the tenant's sales:

• Percentage rate (e.g., 5% of gross sales)
• Calculation base (gross sales, net sales, etc.)
• Reporting and payment frequency (monthly, quarterly, annually)
• Audit rights for the landlord

Late Fees

North Dakota does not impose statutory limits on commercial late fees. Common structures include:

• Flat fee: A fixed dollar amount (e.g., $100 per occurrence)
• Interest-based: A percentage of outstanding rent (e.g., 1.5% per month)
• Grace period: Number of days after due date before late fee applies

Security Deposit

Unlike residential leases, North Dakota does not impose statutory limits on commercial security deposits. The amount is determined by negotiation between the parties.

Common Provisions:

• Amount: Typically 1-3 months' rent, or a negotiated sum
• Timing: Due at lease signing or before occupancy
• Holding: May be held in escrow in a separate bank account
• Interest: Commercial deposits typically do not accrue interest unless negotiated
• Application: Cannot be used for last month's rent without landlord's written permission

Return Timeline: While North Dakota requires return of residential security deposits within 30 days, commercial deposits are governed by lease terms. Best practice is to specify the return timeline in the lease agreement.

Insurance Requirements

Tenant Insurance

Commercial leases typically require the tenant to maintain:

• Commercial General Liability (CGL): Commonly $1,000,000-$2,000,000
• Property Insurance: Coverage for tenant's personal property and improvements
• Business Interruption Insurance: Optional but recommended
• Workers' Compensation: Required if tenant has employees

Additional Requirements:

• Landlord named as 'additional insured' on liability policies
• Certificate of insurance provided before occupancy
• Written notice of cancellation (typically 30 days)

Landlord Insurance

In Gross Lease arrangements, landlords typically maintain:

• Building/structure insurance
• Casualty insurance against fire and extended perils
• Loss of rents coverage
• Liability insurance for common areas

Waiver of Subrogation: Consider including a mutual waiver of subrogation provision, which prevents either party's insurer from seeking recovery from the other party for covered losses.

Renewal and Expansion Options

Renewal Options

Renewal options give the tenant the right to extend the lease for additional term(s). Key elements include:

• Number of renewal terms available
• Duration of each renewal term
• Notice requirement (typically 6-12 months before expiration)
• Rent determination method (fixed rate, market rate, CPI adjustment)

Expansion Options

Right of First Offer (ROFO): Landlord must offer adjacent space to tenant before marketing to others.

Right of First Refusal (ROFR): Tenant has right to match any third-party offer for adjacent space.

Assignment and Subletting

Assignment: Transfer of the tenant's entire lease interest to a third party.

Subletting: Granting a portion of the leased space or a portion of the lease term to a subtenant while the original tenant remains liable to the landlord.

Common Provisions:

• Landlord consent required (cannot be unreasonably withheld)
• Written request with proposed assignee/subtenant information
• Processing fee ($1,500-$5,000 typical)
• Original tenant may remain liable after assignment

Reasonable Grounds for Denial: Financial instability of proposed assignee; incompatible use; violation of exclusivity agreements with other tenants.

Default and Remedies

Types of Default

Monetary Default: Failure to pay rent, additional rent, CAM charges, or other amounts due.

Non-Monetary Default: Breach of other lease terms such as unauthorized use, failure to maintain insurance, or violation of covenants.

Notice and Cure Periods

Under North Dakota law (N.D.C.C. Chapter 47-32) ^[2]:

• Rent Default: 3-day notice to pay or quit
• Lease Violation: 3-day notice to quit (no cure right required by statute)

Landlord Remedies

• Terminate lease and recover possession
• Rent acceleration (collect remaining lease term rent)
• Apply security deposit to amounts owed
• Recover actual damages and attorney's fees
• Seek injunctive relief for non-monetary breaches

Duty to Mitigate: Landlords have a duty to make reasonable efforts to re-let the premises to minimize damages.

Holdover Tenancy

A holdover tenancy occurs when a tenant remains in possession after the lease expires without the landlord's consent. Common provisions include:

• Holdover rent: 150%-200% of the final month's rent
• Month-to-month tenancy at landlord's option
• Tenant liability for landlord's consequential damages
• Forfeiture of renewal rights

Ada Compliance

Under the Americans with Disabilities Act ^[4], both landlords and tenants share responsibility for accessibility compliance in commercial properties.

Landlord Responsibilities:

• Common areas (parking, entrances, hallways, restrooms)
• Structural modifications to building
• Original construction compliance

Tenant Responsibilities:

• Interior leased space accessibility
• Alterations and improvements within the space
• Business operations compliance

Personal Guarantees

When the tenant is a business entity (LLC, corporation), landlords often require a personal guarantee from the business owners or principals.

Types of Guarantees:

Full/Absolute Guaranty: Covers all tenant obligations without limitation.

Limited Guaranty: Capped at specific dollar amount; may 'burn off' over time.

Springing Guaranty: Becomes effective only upon triggering event (default, bankruptcy).

Good Guy Guaranty: Guarantor liability ends upon proper surrender of premises with proper notice.

Force Majeure, Casualty, and Condemnation

Force Majeure

Force majeure clauses address events beyond the parties' control, such as natural disasters, war, pandemic, or government action. Key considerations:

• Effect on rent obligations during the event
• Extension of performance deadlines
• Termination rights if event extends beyond specified period

Casualty (fire/damage)

Address what happens if the premises are damaged or destroyed:

• Landlord's obligation to repair
• Rent abatement during repair period
• Termination rights if damage is substantial or repair timeline exceeds threshold

Condemnation (eminent Domain)

If government takes all or part of the premises:

• Total taking typically terminates the lease
• Partial taking may allow termination or rent reduction
• Distribution of condemnation award between parties

How to Create a North Dakota Commercial Lease

Step 1: Negotiate Key Terms

Before drafting, agree on premises, rent, term, expense structure, and major provisions.

Step 2: Draft the Agreement

Use a comprehensive template or engage legal counsel. Include all essential provisions covered in this guide.

Step 3: Review and Revise

Both parties should carefully review all terms. Consider having an attorney review before signing.

Step 4: Execute the Lease

Both landlord and tenant should sign and date the agreement. Each party should retain an original signed copy.

Step 5: Complete Pre-Occupancy Requirements

• Pay security deposit
• Provide certificates of insurance
• Complete any required agency disclosures
• Conduct condition inspection