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
2. How Commercial Leases Differ from Residential Leases
3. Critical Lease Terms
4. Other Considerations
5. Improvements and Repairs
6. The American Disabilities Act
7. Types of Commercial Lease Agreement
8. Commercial Property and Landlord Responsibility
9. Lease Terms for Commercial Property
10. 10 Questions to Ask Before Signing a Commercial Lease
Updated November 27, 2020:
Commercial Lease: Everything You Need to Know
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 right 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 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 information in specifics. Short term contracts have general lease parameters. Which contract to use depends on the business being created.
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 define the same as in a commercial contract.
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 understand the obligations fully.
- Residential leases have standardized forms, whereas commercial leases do not.
- No caps or rules exist on the amount the security deposit should be, and this is only defined in the agreement.
- A tenant’s privacy remains unprotected in a commercial agreement except as defined by the agreement itself.
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.
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 into the contract.
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 will often state 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 correlate 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. The following are some things to consider.
- If most of the business depends on walk-ins, make sure that it is permissible to display signs visible from the street.
- What exactly does the rent pay for in the space provided? Utilities? Gas? Water?
- Ask specific questions, including whether the rent includes insurance, maintenance costs, property taxes, and upkeep of common areas.
- 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 it?
- Think about the areas adjacent to but not part of the main rental space.
- Are there restrooms, hallways, or elevators?
- Don’t forget air conditioning and heating. Is the space equipped with that? Who owns it, and what happens if it becomes damaged? Who pays for it?
After looking into all of these and receiving the relevant information, decide if the rent amount remains fair.
Things will most likely have to be modified for the new business to operate. In terms of improvement, repairs, and additions, these are the following things to consider:
- Who will pay for new fixtures, shelving, and room dividers, if necessary?
- If the business is a success, can more space be added? Can the lease be renewed?
- If the work coming in is high in volume and employees are added, requiring a bigger space, can this lease be subleased or assigned to another tenant?
- If a dispute arises, how does it become solved? If termination because necessary, what notices, penalties or requirements are necessary for the contract to be fulfilled?
All businesses open to the public with more than 15 people must create premises that have accessibility for disabled people. Here are the things to consider to be in accordance with the American Disabilities Act.
- Think about wide doors and ramps to accommodate persons in wheelchairs.
- Consider adding railings in places where the floors do not match in height, and a person must step up or down.
- Check the local codes for recommendations.
- Don’t forget about restrooms having access for people with disabilities-- federal law mandates it and sometimes years down the road, when a facility is found to not accommodate this, it will most likely receive a fine.
In most cases warehouses, industrial space, office buildings situations use the commercial lease agreement. Individuals, groups, or other business enterprises can become a tenant. The commercial lease defines those in wide categories.
- Office Space – Located in the same building either actual rooms or cubicles housing various professions and differing trades makes up office space. Professional traders use this structure such as telecommunications, accounting, medical firms, or law firms, etc.
- Retail and Restaurant Space- Located in buildings or stand-alone buildings this structure has shopping centers, strip malls, and regular mall formats. Classified as fast-food restaurants, specialty eateries, chain stores, independents, or clothing stores it serves the public, and the building often becomes part of the branding.
- Industrial Space – More about 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 commercial lease consist of medical clinics and hotels.
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. Commercial leases allow for a percentage of the utilities and operating cost 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 or tax entity or the landlord. Any changes to the property must become approved by the landlord. Improvements depreciate over time according to tax laws so determine who tracks that and submits that to the IRS.
A certain type of Language exists for commercial property agreements. The terms often 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 happens 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 negotiating to the original terms the landlord or tenant had. Someone must give the 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 repair and maintenance.
- Triple Net Lease – A tenant pays for all costs 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 which splits operating expense and structural repairs as well as common area maintenance between tenant and landlord
Commercial leases remain a complicated document that takes forming a relationship to negotiate terms. To make sure all areas become covered ask these questions before, during, and right after the negotiation before signing.
- Did I understand the entire lease?
- Do I understand all the terms and what it means 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?
It would be wise to not sign immediately but to instead 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 businesses 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 about what the needs and goals for the business relationship should be.
If you need help with creating 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 small businesses to corporate. Their level of expertise ensures you the best and latest legal advice.