Any business that rents property is subject to a commercial lease agreement. Since commercial lease agreements can be complex, it’s essential to understand how they work in order to enter an arrangement that works for your business.
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Understanding Commercial Lease Agreements:
A commercial lease agreement is a contract between a landlord and tenant (lessor and lessee) regarding the rental of commercial property.
Commercial lease agreements outline the terms of a commercial rental arrangement, from the duration of the tenancy and how much rent costs, to how the property can be used, to who is responsible for property maintenance.
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There are numerous types of commercial leases, and the type of commercial lease agreed upon can drastically change what tenants owe and pay for. Several common kinds of commercial leases are described below.
A gross lease allows a tenant to pay a fixed rent at set intervals for a specific amount of time. (For example: $5,000 once a month for five years.) Since the rent is fixed, it can allow for easier budgeting than some other commercial lease options. There are two types of gross leases: full service and modified.
Net leases require tenants to pay a base rent as well as some or all of a building’s expenses. Because of the increased expenses, rent may be lower. There are three common types of net leases: single, double, and triple. The higher the number, the more expenses the tenant is responsible for.
Percentage leases require tenants to pay rent plus a percentage of gross sales earned while conducting business at the rental property. Percentage leases are common at malls and other retail establishments. The specifics of percentage lease arrangements—including at what point the percentage rent kicks in and at what percentage—need to be described in the lease agreement.
The contents of a commercial lease agreement vary by situation and location, just like with residential lease agreements. Different jurisdictions may have varying commercial lease rules and statutes. However, most commercial leases will cover many common elements.
For a commercial lease, parties are the landlord and tenant(s). The tenant will likely be the business using the property, rather than the individuals. This is an important distinction. While individual names may need to be included on the lease as well, listing the accurate legal business name is essential.
A description of the rental property should be included in what is potentially called a “premises clause.” Sometimes the description is extremely detailed, noting hallways, common areas, parking spaces, bathrooms and more. Other times—especially in cases where the entire property is rented, as opposed to a portion of the property—the description may be more general.
Commercial leases may contain a “use clause,” which describes what you can (and in some cases, can’t) do at the rental property. For example, a use clause may prohibit you from using the property as a retail space. Conversely, a use clause might say that the property can only be used as a retail space.
The lease needs to say what the rental term’s duration is. The start date must be included, as well as either a specific end date or the number of months after which the lease expires. While commercial leases can be short term, they usually last for years. Information about lease renewal should also be included.
Rent amount needs to be stated in the lease. Other rent information includes: payment due dates, late fees, whether there’s a grace period before late fees apply, and how rent needs to be paid. Rules around rent increases should be detailed as well.
Most commercial leases require a tenant to pay a security deposit. The lease should say what the tenant needs to do to get the deposit back, if any automatic deductions will be taken, and if the landlord earns interest on the deposit.
Commercial properties often need to be modified to fit a tenant’s needs. The lease should speak to what types of alterations are allowed and whether the landlord or tenant is responsible for implementing and paying for them. The lease should also say whether the property needs to be returned to its original state upon the tenant’s departure.
Who is paying for which utilities? And how will billing be handled if utilities are divided between multiple tenants? These questions should be answered in the lease.
A commercial lease should speak to whether the landlord or tenant will handle upkeep and maintenance of the property. If the landlord is responsible for some maintenance but not all, their responsibilities should be specified.
The tenant may be required to have certain types of insurance while renting a commercial property, such as property or liability insurance. The lease should dictate what insurance, if any, is required.
A commercial lease agreement may include a clause about whether or not subleasing of the property is allowed. If subleasing is allowed, the lease should say whether there are any parameters around this, such as if a background check is required for potential subletters.
What constitutes a breaking of the lease, and what happens if the lease is broken or terminated early? A commercial lease agreement should speak to these terms.
Yes. Every commercial lease is malleable in theory. In all likelihood, the first version of a commercial lease will benefit the landlord more than the tenant. As a tenant, your negotiating power might depend on the commercial rental market and how desirable the specific rental space is. As a landlord, the same may be true: you’ll likely be more able to stick to the initial terms you set forth if commercial rental inventory is low.
The laws and rules that impact commercial property lessors and lessees vary across jurisdictions. While some commercial property laws are at the federal level, other rules may change at city and state levels. It’s important to stay on top of the laws and rules in the jurisdiction where your commercial property is located, as they can effect everything from lease requirements to building codes.
At the federal level, the Americans with Disabilities Act (ADA) serves to prevent discrimination against people with disabilities in numerous arenas, including public accommodations and commercial facilities. Public and commercial areas can include everything from retail stores to museums to office buildings to parks. Enacted by Congress in 1990, the ADA sets forth some of the most far reaching and encompassing rules that impact commercial property owners, landlords, tenants, and builders.
Title III of the ADA says that when existing public or commercial properties are altered, they may need to be modified to increase accessibility and usability for people with disabilities. Likewise, new public or commercial buildings must be constructed to comply with ADA requirements. For example, in a newly built establishment with dressing rooms, 5 percent of the rooms must be accessible (or a minimum of one).
Commercial leases may speak to whether the lessor or lessee is responsible for keeping the property in compliance with the ADA.
It can take anywhere from a day to a year (or more) to negotiate and sign a commercial lease. Since negotiation is part of the commercial lease game, how long it takes to agree upon the lease terms depends on myriad factors, from the rental market to the patience of the potential tenant.
It depends. Commercial lease notarization requirements (or lack thereof) are generally determined by states. When commercial lease agreements do need to be notarized, it’s usually only for leases that last for a certain length of time. In Ohio, for example, only commercial leases lasting for terms longer than three years require notarization. In Washington, a commercial lease lasting longer than a year must be notarized or the lease will be legally considered a month-to-month rental agreement.
Yes. Landlords are generally not required to renew commercial leases. However, in some cases there may be renewal terms written into the lease that landlords must abide by. For example, if the landlord doesn’t plan to renew the lease, they may be required to inform the tenant of this in writing by a certain date.
Yes. Commercial leases can be terminated early, though usually not without penalty. Most commercial leases outline what constitutes early termination for both landlords and tenants. They also outline any consequences therein. (Consequences usually include some kind of payout.) The lease may also say if there are any early termination situations that are penalty-free, such as an extreme weather event that destroys the building, or if the tenant provides 90 days of written notice.
Yes. Both landlords and tenants can break commercial leases if they do not adhere to the terms of the contract. The lease should say what happens if the terms are broken. For example, if a tenant conducts illegal activity on the property, the lease may say that the consequence is eviction and forfeiture of the security deposit.
If a commercial building is sold, the new owner will usually need to honor the terms of tenant leases. However, some commercial leases allow for lease changes or termination upon the property’s sale.