A commercial lease agreement is a legally binding contract executed between a landlord and a business owner to rent a property for the business. The designation “commercial” means that the property will be used strictly for business purposes instead of housing or personal use.
A commercial lease agreement is one of the first steps to conducting business on a commercial property. As the tenant, you need to know exactly what is required of you from the landlord to maintain your business on their premises.
Commercial leases differ from residential properties in that there are often many conditions the landlord may impose on the company renting their property.
This is why knowing how to negotiate a commercial lease is important for ensuring you reach a fair agreement to use the commercial property in exchange for money.
Below are essential things to look for in a commercial lease agreement.
1. Lease Term Type
A lease’s term refers to its length. The lease terms reflect how long you will pay rent to use the property and how long you can conduct business on the premises before renewing or evacuating the property.
There are many different types of commercial lease agreements, such as:
- A single-net lease: You pay a fixed base rent and additional taxes, maintenance, and janitorial service fees.
- A double-net lease : This commercial lease has a base rent, a share of property taxes, insurance premiums for the property, and utilities. The landlord, however, pays for all maintenance of common areas.
- A triple-net lease: Triple-net commercial leases require the tenant to pay rent and all associated fees for maintaining the property, including taxes, insurance, maintenance, repairs, and utilities.
- Absolute triple-net lease: Similar to a triple-net lease, the absolute triple-net lease requires the tenant to pay rent, operational expenses, taxes, and utilities. However, they pay for all these directly, whereas, in a triple-net lease, they may pay the landlord for all these expenses and have them paid on their behalf.
The terms of each agreement will vary, but most tend to be annual, and some could be for several years. When considering the lease terms, it’s important to consider how signing a longer lease will affect your business’s operations.
Long lease terms may hinder your flexibility, making expanding and accommodating business growth harder. This is why you may find it better to take a shorter lease with flexible renewable terms rather than a fixed, long-term lease.
Here is an article to learn more about the different types of commercial leases
2. Rent Amount
The rent amount is one of the most important factors of any lease. However, the rent amount may not be the only monthly figure to worry about when renting a commercial property.
Many commercial leases have less protection because they are less regulated than a residential lease agreement. Because of this, allotments for increases during the lease may not be typical in a residential rental contract.
It is important to read the terms of the rent amount. Is the landlord allowed to increase the rent at any time, without prior notification, during the lease? What rights do you have to negotiate or contest any escalations? What happens if you are unable to pay the increased rent?
The rent amount may also fluctuate depending on your business's revenue. This type of agreement is known as “percentage rent,” in which the tenant pays base rent and a percentage of their gross sales.
Here is an article that defines a lease and how rent factors into this type of contract.
3. Security Deposit Requirements
You should know how much you have to pay before renting the property and the conditions affecting your deposit’s return. Some commercial properties will deduct from a security deposit after you vacate the premises for things such as:
Security deposits play a significant factor in the commercial lease agreement cost as they make up the initial investment the tenant must pay to secure the contract.
Ensure that your agreement clearly defines what can and cannot be taken out of your security deposit, how long it will take for the landlord to return the deposit after the lease ends, and how your deposit will be returned.
Here is an article about understanding security deposits in commercial leasing.
4. Permitted Use
Permitted use refers to how you are allowed to operate your business on the commercial property while you are leasing it. Permitted use is one of the most important lease terms in a commercial lease agreement because it directly influences how and when you can operate.
For example, permitted use can require you to only use the property for the business you initially signed the lease for.
Depending on your industry, you may be restricted to certain permitted uses depending on the type of building you operate from. In addition, zoning laws have a large influence on what kind of businesses can take place in specific commercial properties.
Here is an article that goes into further detail about building zoning, which affects its permitted use based on geographic location.
5. Exclusive Use
An exclusive use clause is standard in commercial leases to prevent competition from neighboring rentals. For example, an exclusive use contract in a shopping center can ensure you are the only computer repair store or insurance office in the vicinity.
In other cases, exclusive use may function similarly to a permitted use and define what you can use the property for. For example, under an exclusive use clause, you may only use the commercial property for a specific purpose, such as the sale of apparel, electronics sales, or office work.
Here is an article that details the pros and cons of exclusive use in a commercial lease.
6. Maintenance and Renovations
The commercial lease should specify who will pay for all necessary maintenance during the lease term. Additionally, there should be terms and specifications about what types of renovations you can make to the property.
Renovations that are required out of necessity may fall to the landlord. Still, the tenant might be responsible for maintaining the property and demonstrating a natural need for renovations, e.g., old windows that need to be replaced.
Renovations may also be required to receive approval from a landlord before any work can take place. Additionally, the landlord may reserve the right to need any maintenance and renovation projects to be performed by an approved contractor.
Here is an article that discusses commercial property maintenance requirements for tenants.
7. Exterior Appearance
Many commercial property leases may have terms surrounding what changes the tenant can make to the exterior.
The exterior appearance includes:
- The storefront
- The surrounding landscape.
- The signage on the premises
Signage generally receives a large amount of attention in exterior appearance clauses. However, the landlord reserves the right to set the requirements for all business signage size, placement, lighting, and general design.
Make sure you ask about any unclear concerns about the property's exterior—for example, parking spaces, flower beds, porches, and window displays.
8. Insurance Requirements
The insurance requirements for a commercial lease are generally greater than those required in a residential setting. Therefore, the agreement should specify what type of commercial insurance the tenant must maintain.
If the landlord holds the insurance, the agreement may require the tenant to pay the premiums during their lease term.
An article provides further information on why commercial lease agreements require insurance.
9. Americans With Disabilities Act Compliance
Under the ADA, no owner or tenant of a commercial property can discriminate against individuals with physical or mental disabilities. Discrimination includes:
- The refusal of service or sales of goods
- Denial of access to facilities
- Other accommodations available to non-disabled consumers
A commercial lease should include a clause requiring the tenant to always comply with the ADA.
Here is an article about how the Americans With Disabilities Act affects commercial real estate.
10. Personal Guarantee
The personal guarantee in a commercial lease makes you, the tenant, personally liable for any rent your business’s profits cannot cover.
Sometimes, you may have to put some of your assets, such as real estate, a car, or savings, up as collateral. These assets can be taken under the personal guarantee to pay rent if you cannot cover the cost otherwise.
Suppose you can demonstrate financial success and a steady cash flow over time. In that case, you may be able to amend your lease and remove the personal guarantee agreement.
Here is an article covering how to navigate personal guarantees when leasing commercial real estate as a small business owner.
11. Amendment, Modification, and Termination
A lease modification agreement is an existing commercial or residential lease amendment. You can use a lease modification to make changes to the agreement.
Negotiating the terms of a lease agreement can be beneficial, and it is advisable always to ask questions and suggest modifications before signing a lease.
Lease modification can affect many things, such as:
- Rental amounts
- Security deposits
- Term length
The lease should also include policies for cancellation of lease from either party, including any penalties the tenant could be subject to if they terminate their rental agreement early or without due notice.
Here is an article that explains lease modification agreements in greater detail.
Subleasing is when a tenant rents out the property they are leasing.
Some landlords prohibit subleasing altogether, but others are open to negotiating under certain terms.
You may consider subleasing if:
- Your business has grown and you need to expand
- Your operating costs are too expensive, so you want to downsize
- You are not generating enough profits to sustain your space, but you cannot get out of your lease
Here is an article covering what you need to know about commercial subleasing agreements.
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