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What is a Commercial Lease?

A commercial lease outlines the terms and conditions when a business rents a commercial property to conduct business from that location. It's a legally binding agreement made between a landlord, "LESSOR" (often the owner of the property) and a business tenant "LESSEE" that must be followed. Commercial real estate brokers can help negotiate the terms of the lease.

What Is Included in a Commercial Lease Agreement?

A commercial lease agreement outlines the rights and responsibilities of a "LESSEE" and "LESSOR." It includes the following terms and conditions:

  • Both of your names and information
  • The address and basic information about the property
  • The type of commercial building you're leasing
  • The square footage of the space
  • The length of the lease and the terms of renewing the lease
  • The cost of rent and when you must pay it
  • The cost of the security deposit.
  • An outline of how you may use the leased space
  • An outline of what changes or renovations you may make. It may also explain whether the business owner or property owner is responsible for these changes
  • Fixtures or appliances the lease provides

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Common Commercial Lease Agreements

  • Net Lease A net lease is when you are responsible for paying the base rent as well as the utilities, maintenance, and insurance. This popular commercial lease is broken up into even more distinct categories:
    • Single net lease : Although not very common, single net leases are the most straightforward net leases. As a tenant, you are responsible for paying the rent and property taxes of the space.
    • Double net lease: You are responsible for paying the rent, property taxes, and building insurance. The landlord must pay the costs of utilities, maintenance, and any other expenses that may arise. This type of lease is common for multi-tenanted buildings since the property owner is financially responsible for structural issues. The amount you pay will vary based on how much square footage you are leasing.
    • Triple net lease : With this kind of lease, property can have big advantages. As a tenant, you are responsible for most of the costs relating to your occupation of a commercial space. You pay for rent, maintenance, insurance, taxes, utilities, and standard property repairs. Proceed with caution when deciding if you want a triple net lease, as you could be responsible for high expenses, like a broken HVAC or leaky roof. The advantage is that the base rent for these properties tends to be lower.
    • Bondable net leases: This lease is close to a triple net lease, but you have even more stakes in your rental space since the tenant cannot terminate the lease even if the property becomes unusable. You are responsible for any risks associated with the commercial space, such as natural disasters or fires. These types of leases are quite rare, although the benefit for tenants is that the landlord has fewer termination rights.
  • Gross Lease These are the two types of gross leases you may see as a commercial property tenant:
    • Full-service gross lease: You pay a fixed rent payment every month. As a business owner, this is the easiest rent to budget for since you can expect to pay the same flat rate each month. Your landlord is responsible for all other expenses, including insurance, utilities, taxes, and property management fees.
    • Modified gross lease : With this lease, the landlord is still responsible for insurance, utilities, taxes, and property management fees. Along with paying your fixed rent each month, you are also responsible for any incremental increases in operating costs. For instance, if the property taxes of the building suddenly increase, you may have to pay for a portion of that increase.
  • Percentage Lease Restaurants and retailers are the businesses who are more likely to sign percentage leases. Generally, you see them used with businesses that have varying sales volumes, since the rent adjusts to their revenues. Percentage leases are when you pay the base rent and a percentage of your business's gross income. Before signing the lease, you and the landlord will agree upon a set percentage. The more your business makes, the more you will pay to your landlord (although the percentage will stay the same). This type of lease helps the business owner and property owner work together to increase the business's profits. This is a smart lease to choose if you want help with promotion efforts.

See Commercial Lease Pricing by State

Commercial Lease Terms You Should Know

Before signing anything, get to know these commercial lease terms:

  • Additional rent Rent that you must pay in addition to your set base rent. It may include add-ons, like parking fees, common area maintenance, or emergency maintenance.
  • Agent A person who may represent a landlord or tenant when negotiating a commercial lease agreement. They may be a real estate agent, broker, attorney, or salesperson.
  • Build-out Any work that needs to be done to make it possible for a business to operate on the first day of their lease.
  • Building class Commercial properties are rated as Class A, Class B, or Class C. Although there is no standard, Class A tends to be newer, high-quality buildings with amenities and professional management. Class B buildings tend to be older and in a less-than-ideal location but still have good management. Class C usually includes the lowest-end properties that need improvements. Classifications generally relate to the location, quality, and rental rate of properties.
  • Non-competition clause A non-competition clause that prohibits a landlord from leasing a nearby property to a competitor of your business.
  • Assignment and subletting This clause addresses what rights the tenant has to transfer the property to another party.
  • Termination and default This term outlines the tenants’ rights to end the agreement and what happens if the tenant cannot live up to their obligations of the lease agreement.
  • Insurance requirements This section outlines the type and amount of insurance coverage both the tenant and landlord are required to have during the term of the lease.
  • Dispute resolution This term outlines the methods and procedures both parties have at their disposal to use should there be a dispute between them during the term of the lease.

Understanding the terms of your commercial lease is an important part of feeling happy with your contract. Let one of our contract lawyers help you decide if your commercial lease agreement is fair.

The Difference Between Commercial Leases and Residential Leases

One key difference between commercial leases and residential leases is their purpose. With a commercial lease, you must use the space to operate a business. With a residential lease agreement, you are using the property as a home. Here are some other major differences:

  • Longevity and rigidness With a residential lease, there may be more circumstances when you can break your lease. You may need to pay a fee, but that is usually the only caveat. With a commercial lease, there is much more money to lose. If you can even legally break the contract, you may be out of a significant amount of money. It is also worth noting that commercial leases typically have longer terms (5-10 years) compared to residential leases (1 year).
  • Protections Residential tenants tend to have more protection thanks to consumer protection laws. With a commercial lease, in most jurisdictions there are no laws protecting your privacy or limiting the amount of a security deposit.
  • Negotiation With residential leases, there is little to no negotiation that takes place. You must pay the price the landlord listed unless they decide to offer you a good deal. As a business owner, you have more negotiation power with a commercial lease. You and a landlord may negotiate special terms and conditions so they can fill their space.
  • Standardization Many residential leases follow a very similar format and include many of the same terms and conditions. With a commercial lease, the contract is based on the landlord's needs. When they send you the contract, carefully look over every detail. Hire a contract lawyer to read through it and explain anything you may not understand. They can also help you negotiate any changes you want to make to the agreement.

How Do Commercial Leases Work?

Commercial leases can help commercial landlords manage tenant relationships while protecting their business. It is critical to understand commercial leases before renting space to a small business. The type of commercial lease, terms, and termination requirements are vital elements of your contracts and affect how you negotiate the outcome.

There are generally three types of commercial leases, in general, including:

Before signing a commercial lease you should consult a real estate lawyer that will explain the right type, payment terms, and other details to help you negotiate the best deal.

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Christina M. on ContractsCounsel
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Christina M.

Legal Consultant
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Las Vegas, NV
17 Yrs Experience
Licensed in NV
UNLV Boyd School of Law

I am a regulatory transactional attorney with 16 years of in-house experience, largely in the gaming/gambling industry. I have negotiated various types and sizes of contracts from janitorial services for a small commercial building to multi-million dollar technology transactions. I also have a strong regulatory background that strengthens my ability to navigate contracts that are subject to stringent regulations.

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Rene H.

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San Diego, CA
13 Yrs Experience
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Northwestern University

I am an attorney licensed in both California and Mexico. I offer a unique blend of 14 years of legal expertise that bridges the gap between diverse legal landscapes. My background is enriched by significant roles as in-house counsel for global powerhouses such as Anheuser-Busch, Campari Group, and Grupo Lala, alongside contributions to Tier 1 law firms. I specialize in navigating the complexities of two pivotal areas: AI/Tech Innovation: With a profound grasp of both cutting-edge transformer models and foundational machine learning technologies, I am your go-to advisor for integrating these advancements into your business. Whether it's B2B or B2C applications, I ensure that your company harnesses the power of AI in a manner that's not only enterprise-friendly but also fully compliant with regulatory standards. Cross-Border Excellence: My expertise extends beyond borders, with over a decade of experience facilitating cross-border operations for companies in more than 20 countries. I am particularly adept at enhancing US-Mexico operations, ensuring seamless and efficient business transactions across these territories.

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Michael B.

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Illinois
14 Yrs Experience
Licensed in IL, MN, WI
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Michael has extensive experience advising companies from start-ups to established publicly-traded companies . He has represented businesses in a wide array of fields IT consulting, software solutions, web design/ development, financial services, SaaS, data storage, and others. Areas of expertise include contract drafting and negotiation, terms of use, business structuring and funding, company and employee policies, general transactional issues as well as licensing and regulatory compliance. His prior experience before entering private practice includes negotiating sales contracts for a Fortune 500 healthcare company, as well as regulatory compliance contracts for a publicly traded dental manufacturer. Mr. Brennan firmly believes that every business deserves a lawyer that is both responsive and dependable, and he strives to provide that type of service to every client.

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I am an experienced technology contracts counsel that has worked with companies that are one-person startups, publicly-traded international corporations, and every size in between. I believe legal counsel should act as a seatbelt and an airbag, not a brake pedal!

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John H.

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John Daniel "J.D." Hawke is an experienced attorney with a law practice in Mobile, Alabama. He was born in Fairhope, Alabama and after earning his undergraduate degree at Auburn University, he received a law degree from Thomas Goode Jones School of Law in 2010. After law school, he formed the Law Office of J.D. Hawke LLC and over the last decade he has fought incredibly hard for each and everyone of his clients. His practice focuses on representing people facing criminal charges and clients dealing with family law matters. In addition to criminal defense and domestic relations cases, he also regularly handles contract disputes, personal injury cases, small business issues, landlord/tenant disputes, document drafting, and estate planning. He is licensed to practice law in the State of Alabama and the United States District Court for the Southern District of Alabama.

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Thomas Codevilla is Partner at SK&S Law Group where he focuses on Data Privacy, Security, Commercial Contracts, Corporate Finance, and Intellectual Property. Read more at Skandslegal.com Thomas’s clients range from startups to large enterprises. He specializes in working with businesses to build risk-based data privacy and security systems from the ground up. He has deep experience in GDPR, CCPA, COPPA, FERPA, CALOPPA, and other state privacy laws. He holds the CIPP/US and CIPP/E designations from the International Association of Privacy Professionals. Alongside his privacy practice he brings a decade of public and private transactional experience, including formations, financings, M&A, corporate governance, securities, intellectual property licensing, manufacturing, regulatory compliance, international distribution, China contracts, and software-as-a-service agreements.

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Contracts

Commercial Lease

New York

Asked on Apr 25, 2023

What's the entire agreement clause in a commercial lease?

I am a small business owner who recently signed a commercial lease for my business premises. I am concerned about the “entire agreement” clause in the lease, as I am not sure what it covers and what the implications are for me and my business. I am looking for clarification on the clause and any potential risks associated with it.

Matthew S.

Answered Apr 27, 2023

This is a contractual provision which aims to prevent the party relying on it from being liable for any statements or representations (including pre-contractual representations) except as expressly set out in the agreement. It generally precludes the introduction of parol evidence or evidences of other agreements that are not in writing.

Read 1 attorney answer>

Commercial Real Estate

Commercial Lease

California

Asked on Apr 25, 2023

What is a commercial lease agreement and how does it work?

I am a business owner interested in renting a commercial space for my business. I am trying to understand the details of a commercial lease agreement and how it works so I can make an informed decision about whether or not to sign a lease. I am looking for information about the terms, conditions, and other relevant details that could affect my business.

MICHAEL B.

Answered Jun 2, 2023

A commercial lease agreement sets out the parameters of the space to be leased, including a description of the premises, an allocation of responsibilities for janitorial services, electrical services, tenant improvements, insurance requirements, payment of rent and payment of common area expenses, parking for employees and visitors, telephone and telecommunication services and many other issues.

Read 1 attorney answer>

Real Estate

Commercial Lease

Florida

Asked on Apr 21, 2023

What's the force majeure clause in a commercial lease?

I am a small business owner who is in the process of signing a commercial lease for my business. I am concerned about the implications of force majeure clauses in the lease and would like to understand them better. I have read through the clause, but am not sure if it covers all of the situations that may arise and if there are any additional considerations that I need to take into account. I would like to understand the full implications of the clause and any additional steps I should take to protect myself.

Moss S.

Answered Apr 28, 2023

Force majeure is a provision that usually allows either party to delay completing an obligation in a lease. Force majeure is described as an act that is beyond the control of either party, such as a natural disaster, terrorism, or pandemic.

Read 1 attorney answer>

Litigation

Commercial Lease

Texas

Asked on Apr 14, 2023

What's the survival clause in a commercial lease?

I am looking to enter into a commercial lease for my new business. I am unfamiliar with the terms of a commercial lease, and am particularly interested in understanding the survival clause. This clause is important to me because I want to make sure I am fully aware of my rights and responsibilities as a tenant. I need to know what is expected of me should the lease be terminated prematurely.

Curt L.

Answered Apr 28, 2023

A survival clause is fairly standard in a lease. It extends the effectiveness of certain provisions, such as party representations, warranties, promises, and covenants beyond the expiration or termination of the lease, but not beyond the legally prescribed statute of limitations. For example, If you make a fraudulent representation in a 1-year lease, the other party to the lease who is damaged by your fraud could still sue you for that fraud even after the end of the 1-year lease.

Read 1 attorney answer>

Commercial Real Estate

Commercial Lease

North Carolina

Asked on Apr 26, 2023

How is the rent determined in a commercial lease agreement?

I am a small business owner looking to rent a space for my business. I am currently in negotiations with the landlord of a commercial property and we are discussing the terms of the lease agreement. We have reached a point where we need to discuss the rent and how it will be determined. I need to understand more about how rent is determined in commercial leases so that I can negotiate a fair and reasonable agreement.

N'kia N.

Answered May 19, 2023

In North Carolina, commercial rent is commonly calculated as a set dollar amount per square foot. This dollar amount is usually based on factors like location, age, condition, accessibility, and amenities. However, there is no requirement for rent to be determined this way. Unlike a residential lease agreement, the terms of a commercial lease agreement can be almost anything that the parties mutually agree to. As a word of caution, in North Carolina, commercial tenants do not have the same degree of legal protections as residential tenants. For just one example, a tenant who wishes to terminate a commercial lease early may be responsible for the entire remainder of the rent unless the lease agreement says otherwise.

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