Commercial Lease Agreement: Everything You Need to Know
A commercial lease agreement is a binding contract between a tenant and the landlord to rent a business-related property. 3 min read
A commercial lease agreement is a binding contract between a tenant and the landlord to rent a business-related property. You may hear a commercial lease called by several other names, including commercial lease contract or commercial real estate lease agreement. There are several instances where you need a commercial lease:
- Commercial property being leased/rented to a new tenant
- Commercial property that you plan to convert into a rental property
- You wish to lease commercial property from a landlord and they don't have a lease form
Commercial leases differ from residential ones as there is an assumption that you're not using the property to live in, but rather for business purposes. The type of property being leased can vary depending on the circumstances:
- Small office
- Whole building
- Retail store
- Self-storage facility
- Manufacturing factory
Important Provisions in a Commercial Lease Agreement
Understanding some of the differences between residential and commercial lease agreements can help determine whether a commercial lease is right for you:
- Permitted use — Properties that are for commercial use have a specific commercial purpose and it's spelled out in the agreement.
- Exclusive use — Guaranteed exclusive rights are important when you're renting a space in a larger complex (like a shopping mall) and you want exclusive rights to a certain type of business.
- Insurance responsibilities — Decide on who is responsible for insurance. The landlord, the tenant, or both are responsible. Insurance types of note include casualty and liability coverages.
- Maintenance — With a commercial lease agreement, the landlord generally is responsible for maintenance.
- Payments and renewals — Discuss how and when rent collection occurs, what the allowed grace period is, and will it automatically renew or is a renegotiation necessary?
- Special provisions — Spell out any special provisions that are unique to your specific lease. This could include something like an ok to remodel the building, decide on the dispute resolution process, etc.
How Commercial Leases and Residential Leases Differ
Legally and practically speaking, commercial leases and residential leases have quite a number of differences:
- There are fewer consumer protections in place for commercial leases, like no cap on a security deposit or any rules regarding the tenant's privacy.
- There are no standard forms utilized in commercial leases.
- Commercial leases are usually over a longer term and they are not easy to break.
- These undergo more significant negotiations between the landlord and possible tenant, especially if there are special needs.
Important Lease Terms
Any commercial lease needs to have a number of critical terms and provisions included:
- Lease term
- Rent and whether escalations (increases) are permissible
- What costs factor into the lease (insurance, property tax, maintenance, etc.)
- Security deposit and terms of its return
- What space you're renting
- Sign specifications
- Who is responsible for repairs?
- Modifications, special features, fixtures, etc., and who pays/owns for them
- Sublease (if allowed)
- Renewal terms
- Termination clause
- Alternative Dispute Resolution (ADR)
The Americans with Disabilities Act (ADA) requires that any business which is open to the public or has more than 15 people employed on its premises be accessible to the disabled. If the space needs modifications to comply with the ADA, the lease should detail who will pay for any changes being made.
There are other questions a commercial lease should address as well:
- Who pays for sewage and other utility services?
- What happens in a fire or other disaster?
- What laws and jurisdiction should apply in a dispute?
- When does the landlord have access for inspections and repairs?
- If a tenant files bankruptcy, is it a breach of contract?
- What happens in the case of eminent domain or other similar circumstances where the government takes the land?
Commercial leases are subject to local laws and will be upheld in court as courts tend to uphold the terms of commercial lease agreements. This differs from residential leases where associated laws offer more protections for tenants. Spelling out lease agreements in a commercial space clearly is important so both parties understand exactly what they are contractually liable for.
Four Types of Leases
There are four main types of commercial leases:
- A gross lease, or full lease, rent includes operating expenses.
- A net lease does not include operating expenses.
- A modified gross lease is a blend of net and gross leases and operating expenses are split between parties.
- A percentage lease, where the tenant pays a percentage of gross revenue to the landlord in addition to the rent.
If you need help with a commercial lease agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.