Commercial Lease Terms You Should Know
Commercial leases can be complex and confusing, with many legal terms and clauses that can leave even experienced business owners scratching their heads. However, understanding these lease terms is essential to protect your business and ensure a successful tenancy. From base rent to common area maintenance charges, knowing the ins and outs of commercial leasing can save you from costly mistakes and unexpected expenses.
In this post, we’ll break down some of the most important commercial lease terms you need to know to negotiate a fair and favorable lease agreement for your business. So whether you’re a new business owner looking for your first commercial space or a seasoned entrepreneur seeking to expand your operations, read on to learn about the crucial lease terms that can make or break your commercial lease agreement.
Table of Contents
Commercial Lease vs. Residential Lease
Commercial leases and residential leases differ in many ways. While residential leases are designed to cover the rental of living spaces, such as apartments or houses, commercial leases are used for renting commercial properties such as office buildings, retail spaces, warehouses, and industrial facilities.
One of the key differences is that commercial leases tend to be more complex than residential leases, as they often involve negotiations of terms like rent, operating expenses, maintenance responsibilities, and more.
Additionally, commercial leases tend to have longer lease terms than residential leases, which usually last for one year. Commercial leases can run anywhere from 3 to 20 years, depending on the needs of the tenant and the landlord. Unlike residential leases, which are governed by state and local landlord-tenant laws, commercial leases are usually negotiated between the tenant and landlord and are governed by contract law.
Commercial leases tend to be more complex and longer-term than residential leases due to the different needs and expectations of commercial tenants and landlords.
Understanding Different Types of Commercial Leases
Commercial leases come in different types. Understanding the differences can help business owners choose the best option.
One of the most common commercial leases is the gross lease, also known as a full-service lease. Under this type of lease, the tenant pays a fixed amount of rent that includes all operating expenses, such as property taxes, insurance, and maintenance costs.
Another type of commercial lease is the net lease, which requires the tenant to pay for some or all of the operating expenses in addition to the base rent. In a triple net lease, for example, the tenant is responsible for paying property taxes, insurance, maintenance costs, and base rent.
A modified gross lease is a combination of gross and net leases, where the tenant pays a fixed amount of rent that includes some but not all operating expenses.
Finally, there is the percentage lease, which is common in retail leasing. Under this type of lease, the tenant pays a base rent plus a percentage of their gross sales.
Understanding the differences between these types of commercial leases is important because they can significantly impact a business’s bottom line and financial planning.
Commercial Lease Terms to Know Before Signing a Lease
Signing a lease is a significant commitment, and it’s important to clearly understand the terms before putting pen to paper. Here are some things to keep in mind before signing a commercial lease:
Lease Term: Understand the length of the lease term and any options for renewal or termination.
Rent and Other Fees: Know the base rent and any other fees, such as common area maintenance charges, property taxes, insurance, and utilities.
Tenant Improvements: If the space needs renovations, know who will be responsible for paying for them and what type of improvements are allowed.
Use Clause: Ensure the lease agreement specifies the permitted use of the space and any restrictions.
Assignment and Subletting: Understand the options and requirements for transferring or subletting the lease.
Guarantees and Security Deposits: Know what types of guarantees the landlord may require and the security deposit amount.
Legal Obligations: Be aware of your legal obligations as a tenant, such as compliance with zoning regulations, ADA requirements, and building codes.
Negotiation: Consider negotiating terms that suit your needs, such as rent increases or early termination clauses.
Reviewing the lease agreement thoroughly and seeking professional advice before signing is essential. Taking the time to understand the lease terms can help avoid surprises and ensure a successful tenancy.
Everything Can Be Negotiated
When it comes to commercial leasing, most lease terms are negotiable. While some terms are standard, others can be customized to suit the needs of both the tenant and the landlord.
One key lease term that can be negotiated is the base rent. Tenants can negotiate a lower rent, especially if they are willing to sign a longer lease term. Another negotiable term is the security deposit, which tenants may be able to negotiate for a lower amount or request that it be paid in installments.
Tenant improvements can also be negotiated, with tenants able to request landlord-funded or shared-funded improvements or specific improvements before moving in. The lease term can also be negotiated, with tenants able to request a shorter or longer lease term depending on their business needs. Operating expenses can be another point of negotiation, with tenants able to request a cap on CAM charges or a reduction in the landlord’s management fees.
Additionally, tenants can negotiate the right to renew the lease for an additional term, request a first right of refusal for a specific space, or ask for greater flexibility in assigning or subletting the space. Finally, tenants may be able to negotiate for the right to terminate the lease early or request that the landlord provide a buy-out option.
Remember that negotiation is a give-and-take process. Both parties should be willing to compromise to reach a fair agreement. It’s important to communicate your needs clearly and seek professional advice to ensure both parties’ lease terms are fair and reasonable.
Elements of a commercial lease agreement
A commercial lease agreement is a legally binding contract that outlines the terms and conditions of a rental agreement for commercial property. Here are some of the essential elements that are typically included in a commercial lease agreement:
Premises: The lease agreement should identify the property being leased, including the address and any specific details about the space, such as square footage.
Lease Term: The lease agreement should specify the lease length, including any options for renewal or termination.
Rent: The lease agreement should outline the amount of rent, how it will be paid, and when it is due. It should also specify any penalties for late payments.
Security Deposit: The lease agreement should specify the amount of the security deposit and the conditions under which it may be forfeited.
Maintenance and Repairs: Most commercial lease agreements should identify the party responsible for maintaining and repairing the property and any restrictions on modifications or improvements.
Use of the Property: The lease agreement should specify the permitted use of the property and any restrictions or requirements related to the tenant’s business activities.
Insurance: Commercial lease agreements should specify the types and amounts of insurance required of the tenant, such as liability insurance.
Assignment and Subletting: The lease agreement should outline the tenant’s rights and obligations regarding the assignment or subletting of the property.
Default and Termination: Most commercial leases should specify the circumstances under which the lease can be terminated, such as non-payment of rent or breach of other lease terms.
Governing Law: The lease agreement should specify the governing law that will apply to the agreement and any disputes that may arise.
These elements are just a few components that can be included in a commercial lease agreement. It’s important to review the lease agreement carefully and seek professional advice to ensure a fair and equitable agreement for both parties.
Understanding Assignment and Subletting Clauses in Commercial Leases
Assignment and subletting clauses are important in commercial leases that address the tenant’s ability to transfer their leasehold interest to a third party. These clauses can be complex and have significant implications for both the tenant and the landlord, making it important to understand their terms and implications fully.
An assignment occurs when a tenant transfers their leasehold interest to a new tenant, who then takes over the remaining lease term. A subletting occurs when a tenant transfers a portion of their leasehold interest to a new tenant, who then occupies the space. At the same time, the original tenant retains some degree of control over the space.
Assignment and subletting clauses in commercial leases require the landlord’s written consent before a tenant can assign or sublet their space. This allows the landlord to evaluate the financial stability and suitability of the proposed new tenant. Some leases may require the new tenant to meet certain creditworthiness or other qualifications.
Assignment and subletting clauses can also specify how the tenant can transfer their leasehold interest, such as whether the transfer can be made to an affiliated company or only to an unrelated third party. The clauses can also set out the procedure for obtaining the landlord’s consent, such as the information that must be provided to the landlord and the timeframe for the landlord to respond.
It’s important to carefully review and negotiate the assignment and subletting clauses in a commercial lease, particularly if there is a possibility that the tenant may need to transfer their leasehold interest in the future. A well-drafted clause can provide clarity and flexibility for the tenant and landlord. In contrast, a poorly-drafted clause can lead to disputes and confusion.
Important Commercial Lease Statutes to Keep in Mind
As a tenant or landlord in a commercial leasing transaction, it’s important to know the various statutes that apply to commercial leases. Here are some of the most important statutes to keep in mind:
Americans with Disabilities Act (ADA): The ADA prohibits discrimination against individuals with disabilities and requires commercial properties to be accessible to people with disabilities.
Fair Housing Act (FHA): The FHA prohibits discrimination in housing based on race, color, religion, sex, national origin, familial status, or disability.
Environmental Protection Agency (EPA): The EPA regulates the handling and disposing of hazardous materials, and landlords must provide a safe environment for their tenants.
Uniform Commercial Code (UCC): The UCC governs commercial transactions, including sales and leases of goods.
Local Zoning Laws: Local zoning laws regulate how commercial properties can be used and can impact a tenant’s ability to operate their business on the property.
State Landlord-Tenant Laws: Each state has laws governing commercial leases, including the notice required to terminate a lease, the handling of security deposits, and the rights and responsibilities of both landlords and tenants.
Understanding how these statutes apply to your commercial lease agreement is important, and ensuring you comply with all relevant laws and regulations is important. Consulting with a legal professional can help you understand your rights and obligations under the law.
Navigating Renewal and Termination Options in Commercial Leases
Renewal and termination options are important provisions in commercial leases that allow tenants to extend or end their lease term, depending on their business needs. These provisions can be complex, and it’s important to fully understand the options available and their implications for both the tenant and landlord.
Renewal options can be valuable for tenants who want to secure their space longer and avoid the hassle and expense of finding a new space. Renewal options allow the tenant to extend their lease term beyond the initial lease term. Typically, the renewal option will specify the length of the renewal term and the procedure for exercising the option.
Termination options allow the tenant to end their lease term before the expiration of the initial lease term. The termination option may be unconditional, allowing the tenant to terminate the lease for any reason, or conditional, allowing the tenant to terminate the lease only under certain circumstances, such as the landlord’s failure to make necessary repairs. Termination options can be useful for tenants who may need to downsize or relocate their business before the end of the lease term.
When negotiating renewal and termination options, it’s important to consider the terms and conditions of these provisions carefully. For example, renewal options may require the tenant to give notice of their intention to renew the lease by a certain date, failing which the option will expire. Similarly, termination options may require the tenant to pay a fee or provide a certain amount of notice to the landlord before terminating the lease.
Understanding the renewal and termination options in a commercial lease is important for tenants and landlords. Tenants should carefully consider their business needs when negotiating these provisions. At the same time, landlords should ensure that the provisions are drafted in a way that protects their interests and provides certainty for the duration of the lease.
Commonly Overlooked Clauses in Commercial Leases
Commercial leases can be complex and lengthy documents with many provisions that can have significant implications for tenants and landlords. While many tenants and landlords focus on negotiating the key terms of a lease, such as the rent and lease term, several commonly overlooked clauses can significantly impact the lease.
One commonly overlooked clause is the exclusivity clause, which grants the tenant the exclusive right to operate a certain business within the leased premises or a certain area surrounding the premises. This can be particularly important for tenants who operate in a competitive market and want to avoid having direct competitors nearby.
Another commonly overlooked clause is the quiet enjoyment clause, which provides the tenant with the right to occupy and use the leased premises without interference from the landlord. This clause can be particularly important in multi-tenant buildings, where other tenants or the landlord may engage in activities that interfere with the tenant’s ability to use their space.
The maintenance and repair clause is also an important provision often overlooked. This clause specifies the parties responsible for maintaining and repairing the leased premises and the procedures for requesting repairs and resolving disputes. Tenants should carefully review this clause to ensure that they are not responsible for repairs that should be the landlord’s responsibility.
Finally, the insurance and indemnification clause is another commonly overlooked provision. This clause specifies the types of insurance that the tenant and landlord must carry and the procedures for making claims and resolving disputes. Tenants should carefully review this clause to ensure they are not assuming excessive risk and that the insurance requirements are reasonable and appropriate for their business.
It’s important for both tenants and landlords to carefully review and negotiate all of the clauses in a commercial lease, not just the most obvious ones. By paying attention to commonly overlooked clauses, tenants and landlords can ensure that their rights and obligations are clearly defined and that they are not exposed to unnecessary risks or costs.
Commercial lease FAQs
What is a typical commercial lease deposit?
The amount of a typical commercial lease deposit varies widely depending on the type of property, location, and other factors. In some cases, the deposit may equal one or two months’ rent; in others, it may be several months’ rent or more. Additionally, the deposit may be based on a percentage of the total lease value rather than a fixed amount.
Are utilities included in commercial leases?
Whether or not utilities are included in a commercial lease agreement is typically negotiable between the landlord and the tenant. In some cases, utilities may be included in the rent. In contrast, in other cases, the tenant may be responsible for paying their utility bills separately.
How long is a typical commercial lease?
The length of a typical commercial lease can vary widely depending on various factors, including the type of property, location, and the landlord’s and tenant’s needs. However, commercial leases are generally longer than residential leases, typically ranging from three to ten years or more.
When should you buy or lease commercial property?
If you have the resources to invest in commercial real estate, purchasing is your best bet; however, if you still need to, opting for a lease may be the way forward. Possessing a commercial property is usually more fiscally wise in the long term than renting. Even so, many businesses can only dedicate little capital to buying real estate, making leasing an attractive option.
About The Author
Please note that Point Acquisitions is not a tax expert or tax advisor. The information on our blogs and pages is for general informational purposes only and should not be relied upon as legal, tax, or accounting advice. Any information provided does not constitute professional advice or create an attorney-client or any other professional relationship. We recommend that you consult with your tax advisor or seek professional advice before making any decisions based on the information provided on our blogs and pages. Point Acquisitions is not responsible for any actions taken based on the information provided on our blogs and pages.
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