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What Is a Commercial Lease?
A commercial lease grants you tenants' rights to a commercial property. It's a legally binding agreement made between a landlord (often the owner of the property) and a business tenant that outlines any terms and conditions you both must follow. Commercial real estate brokers may also negotiate the terms of the lease on behalf of a property owner. Within the lease, the "LESSEE" is the landlord, while the "LESSOR" is the tenant.
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
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.
- Protections: Residential tenants tend to have more protection thanks to consumer protection laws. With a commercial lease, 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.
Common Commercial Lease Agreements
A net lease is when you are responsible for paying the base rent. You also need to pay for all of 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 lease. 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 owners make out the best. 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. 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.
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.
Restaurants and retailers most commonly sign percentage leases. These 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.
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 are in need of improvements.
- Non-competition clause: A non-competition clause that prohibits a landlord from leasing a nearby property to a competitor of your business.
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.
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:
- Type 1 . Gross or full-service lease.
- Type 2 . Modified gross lease
- Type 3 . Net lease
Before renting space for a small business and offering a lease to tenants, ensure that you utilize the right type, payment terms, and obligations. Speak with a real estate lawyer to review your contracts so that they achieve their intended legal purpose.
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