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What is a Commercial Lease Agreement?
A commercial lease agreement is a legally binding contract executed between a landlord and a business owner for the purpose of renting property for the business. The designation of “commercial” means that the property will be used strictly for business purposes instead of housing or personal use.
Many business owners choose to rent property rather than purchase property because it requires less capital . Commercial tenants can operate any kind of business whether it is a small sole proprietorship or a large corporation.
Commercial leases tend to be more complicated than a residential lease and there are certain terms that a landlord and tenant should be sure are included in the agreement.
For a more information and definitions of a lease, read this article.
What To Include in A Commercial Lease Agreement?
Commercial lease agreements are usually negotiable and need to fit the needs of the tenant’s business. Each lease will vary depending on the landlord and tenant’s requirements, but most commercial leases will include the following common terms.
- Cost of rent: The monthly rent amount is usually the biggest concern for both landlord and tenants. The business lease agreement should clearly state the agreed upon monthly rent, the due date for rent, and what utilities, taxes, and insurance the tenant is responsible for.
- Length of lease: Length of lease can vary depending on the needs of the business and landlord. Landlords generally prefer longer leases to ensure consistent payment while a new business may feel safer with a shorter lease. Many leases start out with a term for one year with an option to renew.
- Security Deposit: It is common for a landlord to require a security deposit due at the signing of a commercial lease. The lease should include information about the amount and return procedures of the deposit.
- Property Description: The property that is to be rented needs to be clearly and accurately described in the lease. It should include information like the property address, size of the space, common areas, and parking availability.
- Rent changes or increases: Usually commercial leases will include terms regarding annual percentage-based rent increase. This can normally be negotiated between the tenant and landlord.
- Business signs: A business owner will need to have signage on the property to promote their business. It is important that lease doesn’t prohibit signs on the property and gives details about what kind of signs and what size signs are allowed.
- Improvements or repairs to the property: Another common term in commercial lease agreements addresses whether improvements or modifications can be made to the property. This clause will include who is responsible for payment of improvements and whether the tenant needs to return the property to the original condition at the end of the lease.
- Subletting: Many businesses request the option to sublet the commercial space to a third party. This is because even if the business fails, the tenant will still be responsible for the commercial lease agreement. All terms relating to subletting the property should be laid out in the lease agreement.
- Use clause: A use clause is included in a commercial lease agreement to dictate the kind of activity that the tenant can engage in on the property. This protects the property and the landlord from damages and liability. A tenant is going to want a broad usage clause to allow different kinds of activity on the premises.
- Exclusivity clause: A exclusivity clause is very important for a tenant to have included in a commercial lease if the rental property is in a complex with multiple units. This prevents a landlord from renting additional units to the business’s competition.
Many commercial leases will also contain a clause about the Americans with Disabilities Act . This requires that business spaces open to the public must be accessible to people with disabilities.
It is generally the tenant’s responsibility to make sure their business meets all ADA requirements. The lease should include terms that allow a tenant to make upgrades to stay compliant with the ADA.
Landlords and tenants can include any other terms in a commercial lease agreement that they deem necessary for their rental agreement. A commercial lease agreement is a legally binding contract so all terms will be enforceable. The only unenforceable terms are those that are illegal or too vague.
Common Types of Commercial Leases
There are various types of commercial leases in addition to the standard annual lease agreement. Other types of commercial lease agreements include the following:
- Net Lease: In a Net Lease agreement, the tenant is responsible for paying most, if not all taxes, insurance, and maintenance costs on top of the agreed upon monthly rent.
- Double Net Lease: A Double Net Lease requires the tenant to pay all taxes, insurance, and the monthly rent.
- Triple Net Lease: In a Triple Net Lease, the tenant pays for the taxes, insurance, maintenance, and rent.
- Absolute Triple Net Lease: An Absolute Triple Net Lease absolves the landlord from any responsibility for paying for taxes, insurance, and maintenance. Some expenses that the tenant will be required to cover could include repairs to a building’s roof or main structure.
- Percentage Lease: If a tenant signs a Percentage Lease, they will pay a base rent amount in addition to a percentage of their sales and profits .
- Fully Serviced Lease: This lease agreement, also called a Gross Lease, states that the rent amount is inclusive of utilities and all other services that a tenant would normally have to pay for separately. This is usually used for a short-term lease agreement.
A commercial lease agreement should clearly state which type of lease is being used and how rent is calculated, especially for a Percentage Lease.
This article goes into further detail about Single, Double, and Triple Net Leases.
When A Commercial Lease is Needed
A commercial lease should be executed anytime a business owner is going to rent a property for the purpose of running their business. Commercial leases are binding contracts and protect both the landlord and the tenant.
Leases lay out important terms like rent amount, how rent will be paid, length of lease, and who is responsible for building maintenance. These terms can involve large amounts of money and should never be left up to an oral agreement that can not be proved or enforced.
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How To Write a Commercial Lease Agreement
A commercial lease agreement is a legally binding contract. For the agreement to be legally binding, it will need to include all the essential elements that make a contract legally enforceable.
At a minimum, the lease agreement should include the property address , amount of rent , and duration of the lease with an effective start date. It should also include any other costs that the tenant and landlord will be responsible for. Leases need to be signed by both the landlord and the tenant.
You can find templates for commercial lease agreements online, but these will need to be tailored to fit the needs of the business and the property. If you have questions about drafting a commercial lease agreement, it is best to consult a real estate lawyer who will have knowledge about the laws and requirements for lease agreements in your state.
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