Commercial Lease: Everything You Need to Know
A commercial lease defines as a contract created for renting business property from an individual or another business. 8 min read
A commercial lease is defined as a contract created for renting business property from an individual or another business. The commercial lease contract has other names such as business lease, commercial property lease, commercial real estate lease, industrial lease, or office space lease. No matter which name the contract goes by, it functions the same.
These agreements give a renter or tenant the rights to use that business property for the purpose defined in the lease agreement. The contract will have a term or time period where those particular rules will apply for that particular property. In exchange, the landlord accepts a payment from the tenant for the use of their property. Two types of contracts exist: a long version and a short version. Long versions of the contract cover more specific information. Short term contracts have general lease parameters. Which contract to use depends on the needs of the business.
Before signing, understand that a commercial lease has different clauses than a residential lease, so read carefully and ask questions. Terms defined in a residential contract may not mean the same thing as in a commercial contract.
How Commercial Leases Differ from Residential Leases
Most people have a familiarity with the language of residential leases. A commercial lease differs in some key ways. It does not have the protections that a residential lease has. Commercial leases are not subject to the consumer protection laws that residential contracts receive.
A commercial lease may need to be viewed by a lawyer or paralegal to fully understand the obligations. Residential leases usually have a standardized form, but commercial leases have no standard form or even a standard agreement. No caps or rules exist on the amount the security deposit should be and are only defined by the agreement.
A tenant’s privacy remains unprotected in a commercial agreement except as defined by the agreement itself. A landlord customizes the agreement based on what they believe the needs are for that particular property. All these constraints make it more difficult to break or change any commercial agreement. Ideally, before signing, the tenant and the landlord have negotiated those terms. A tenant rents a space, but in a commercial business, tenants may need special features in that space, so they'll need to make those arrangements before signing.
Having a talk lets the landlord know the tenant’s business needs better. Often, landlords will extend special offers to accommodate a business tenant. Make sure that those agreements get written into the contract.
Critical Lease Terms
Start with the primary terms in the agreement. A business tenant needs to investigate what the terms mean in light of their business needs. Make sure the physical space becomes defined in the commercial lease. Check the rent amount and see if it correlates to what the business will do or need to do. Consider how much the business will make and if it can handle the rent at that amount. Escalations of rent remain common, and the contract often states allowable increases. If taxes or utilities increase, it remains likely the rent will increase if it becomes stipulated in the contract.
Think about the length of the contract. A five or ten-year contract most likely will be too long. A short-term lease with renewal options makes more business sense. Businesses change and grow, and the lease needs to correspond with that. Also, create a section about modifications to the physical space within the commercial lease. Adding structures such as cubicles, loading docks, racks, or fiber optics for better communications with others and between computers has been commonly viewed as a good investment to keep a business viable in today’s markets.
Small items that make a business operate smoothly and efficiently need to become listed in the contract. For example, if most of the business depends on walk-ins, make sure you have the right to display a sign that is visible from the street. Find out what exactly the rent pays for in the space provided? Ask specific questions, such as "Does the rent include insurance, maintenance costs, property taxes, and upkeep of common areas?" Then, negotiate clauses into the contract. If those costs do not become part of the rent, does the landlord or does the business tenant pay for them? Next, think about the areas adjacent to but not part of the main rental place. Restrooms, hallways, or elevators are things that customers expect to be able to use. When comparing business rental spaces, check to see if the landlord included those adjacent areas as part of the rent. Then decide if the rent amount remains fair after that information.
Improvements and Repairs
For the business owner about to use the space, things might have to be modified for the new business to operate. Build-outs in the new space may involve fixtures added, shelving, and room dividers. Determine who pays for that and what happens when the business leaves the premises.
Do not forget the air conditioning and heating. Does the building have these things? Who owns them, and what happens if they become damaged? Who pays for repairs and maintenance? If the business thrives, is any additional space available? Can the lease be renewed? How do the conditions change with the addition? If the work coming in increases and employees are added — or even if another business is created — can this lease be assigned or subleased to another tenant?
Last but not least, if a dispute arises, can it be arbitrated rather than go to court. If termination becomes a necessary route, what notices, penalties, or requirements will be necessary to fulfill the contract.
The Americans With Disabilities Act (ADA)
All business open to the public with more than 15 employees must create premises that have accessibility for disabled people. Think about wide doors and ramps to accommodate persons in wheelchairs. Consider adding railings in places where the floors do not match in height, causing a person to have to step up or step down. Check the local codes for recommendations. Do not forget about restrooms having access for people with disabilities. Federal law mandates it, and sometimes years down the road, a facility can get hit with a fine for noncompliance. Make these changes upfront and determine who pays for them.
Types of Commercial Lease Agreements
In most cases, warehouses, industrial space, and office buildings use the commercial lease agreement. Individuals, groups, or other business enterprises can become tenants. The commercial lease defines those in broad categories.
- Office Space – Located in the same building, either actual rooms or cubicles housing various professions and differing trades make up office space. Professional trades such as telecommunications, accounting, medical, or law firms, etc commonly use this structure.
- Retail and Restaurant Space – Located in buildings or as a stand-alone building, this structure houses shopping centers, strip malls, and regular malls. Classified as fast food restaurants, specialty eateries, chain stores, independents, or clothing stores, it serves the public and often becomes part of the branding.
- Industrial Space – Mostly related to manufacturing, it often appears as a warehouse. Businesses needing storage space, buildings to house manufacturing equipment, or factories make up industrial space.
- Specialized Spaces – Other commercial space that uses a commercial lease consists of medical clinics and hotels.
Commercial Property and Landlord Responsibility
Landlords have the responsibility of ensuring that the permits allow the type of usage stated in the contract. A tenant needs to describe the business accurately to make sure the permit covers such enterprises in that area. Landlords answer to local authorities about building usage. Landlords determine if the property has inclusive or exclusive use of the space. Commercial leases allow for a percentage of the utilities and operating costs to be paid if the site has more than one business tenant. The landlord decides the time period terms of the lease, such as payment weekly, monthly, or annually. Included in the contract, the landlord stipulates how the payment transacts, such as paid directly to the utility company, tax entity, or to the landlord. Any changes to the property must be approved by the landlord. Improvements depreciate over time according to tax laws, so determine who tracks that and submits that to the IRS.
Lease Terms for Commercial Property
A certain type of language exists for commercial property agreements. The terms also have associated financial meaning.
- Fixed End Date – This gives an exact end date for the tenancy. It benefits both parties since it states clearly how long the agreement lasts. Often, the rent cannot become increased during the term. Some have clauses that if the landlord notifies a tenant, changes can be made to the rent.
- Fixed Number of Weeks/Months/Years – This offers a specific time period the terms of the contract follow and which portions follow which time method.
- Tenancy – This refers to the period as a whole that the landlord and the tenant agree the business can reside there. It remains that way until the specified date for termination or an agreed upon date by landlord and tenant. Most use the month by month model.
- Automatic Renewal – This allows the lease to continue without renegotiating the original terms the landlord or tenant had. Someone must give a notice to terminate for it to end.
- Single Net Lease – A tenant pays utilities and property tax while the landlord pays maintenance, insurance, and repairs.
- Net-Net or Double Net Lease – A tenant pays for utilities, insurance premiums, and property taxes, while the landlord pays for repairs and maintenance.
- Triple Net Lease – A tenant pays for all cost in the building space while the landlord becomes responsible for structural repairs.
- Full-Service Gross or Modified Gross – A contract for a multi-tenant building that splits operating expense and structural repairs as well as common area maintenance between tenant and landlord.
Questions to Ask Before Signing a Commercial Lease
Commercial leases remain complicated documents that take forming a relationship to negotiate terms. To make sure all areas are covered, ask these questions before, during, and right after the negotiation but before signing.
- Did I understand the entire lease?
- Do I understand all the terms and what they mean to my business?
- Do I understand the start date, end date, amount of rent, and conditions of change?
- Which items in the lease are non-negotiable, and which items can I still negotiate after signing?
- Which provisions do I not like, and which provisions fit well with my business enterprise?
- Does my business structure mesh well with the structure offered in the contract?
- Can I give a personal guarantee on this lease?
- If circumstances change, can I sublease?
- What responsibilities do I have for capital expenditures or common area maintenance?
- Have I negotiated the best deal for my business?
At that point, do not sign but hire a lawyer to review the document. The landlord will understand that the language needs to be clear on both parties’ part to have a deal and a lasting relationship.
A good relationship between tenant and landlord offers good business opportunities for both parties. It also serves the surrounding community. The microeconomy it creates offers local jobs, flows money into a neighborhood or town, plus offers another way for a community to promote its assets. Good relationships in small and medium-sized business often attract larger businesses to an area since they often provide support products or alliances in an area. The ability to negotiate through a dispute and render a fair judgment in situations that crop up with businesses attracts larger businesses, as well. Using commercial lease agreements makes both parties think clearly on what the needs and goals for the business relationship should be.
If you need help with creating or negotiating a commercial lease, you can post your legal need on UpCounsel’s marketplace. UpCounsel hires only the top 5 percent of lawyers into its site. Most have 14 years of legal service and have worked with everything from small businesses to corporations. Their level of expertise ensures you the best and latest legal advice.