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Commercial Lease Agreement Overview

A commercial lease is a contract between a landlord and a business for the rental of property. Most businesses will rent commercial property instead of buying it because it requires less capital. Commercial lease agreements are more complicated than residential leases. The terms are negotiable and vary from lease to lease. Before signing a commercial lease, you should understand the lease terms that define the rights and responsibilities of each party.

How Are Commercial Leases Different From Residential Leases?

There are significant differences between a commercial lease agreement and a residential lease. Commercial leases have:

  • Fewer legal protections: Consumer laws that apply to residential lease agreements do not cover commercial leases. State laws provide less consumer protection against deceitful landlord practices. Lawmakers assume that business owners are more knowledgeable.
  • Varied terms: Landlords use lease agreement templates for residential leases because there are fewer tenant requirements. Commercial property leases have varied terms because the need of each tenant is different.
  • Negotiable terms: Commercial lease terms are usually negotiable. Terms subject to change include the rent amount, rent increases, the length of the lease, the ability to assign a lease, and allowable improvements.
  • Longer terms: Most residential leases are for a maximum of a year. Commercial lease agreements are often for several years.

Important Commercial Lease Agreement Terms

Before signing a commercial lease agreement, make sure that the terms will meet the needs of the business. Commercial leases should contain these essential terms:

  • Rent amount: A landlord will calculate the rent amount based on the square footage of the space. Be aware of what footage the landlord uses to calculate the rent. For example, does the footage include the elevator and interior walls? Negotiate which party is responsible for costs like utilities, property taxes, insurance, and repairs.
  • Rent payments: Commercial lease payments may not be like an apartment rental. In a gross lease, the tenant pays only the base rent. In a net lease, the tenant pays a share of other operating costs, such as common area maintenance (CAM), property taxes, and utilities. You may pay the rent month-to-month, or you may have an annual rent.
  • Rent increases: Commercial lease agreements usually provide annual percentage-based rent increases. Negotiate with the landlord for a cap on the percentage increase to avoid unmanageable rental costs later.
  • Security deposit: The lease should verify the security deposit amount and the terms regarding its return.
  • Term of the lease: Most commercial landlords prefer long-term lease agreements, which may be unwise for a new business. Ask the landlord for a short-term lease with a renewal term. The rent amount may increase, but it is a better alternative than agreeing to a lengthy term.
  • Improvements: A lease should address what improvements or modifications you can make to the property. Leasehold improvements are structural, and you may have to restore the property to its original condition at the end of your tenancy. Confirm whether you must remove improvements in the lease agreement.
  • Description of the property: The lease should clearly describe the property under lease. For instance, the lease should clarify whether it includes bathrooms, common areas, a kitchen area, and a parking facility.
  • Signs: Ensure the lease agreement allows signs visible from the street. Also, check local zoning ordinances for other signage limitations.
  • Use clause: Many lease agreements incorporate a use clause to define tenant activity. These clauses are in place to protect the property from damage. They can also limit the tenant's business activities, so ask for a broad usage clause if the business expands into other activities.
  • Exclusivity clause: An exclusivity clause prevents a landlord from renting space to a competitor. Retail businesses renting space in a commercial complex need these clauses if they are not prohibited by governing law. Some types of commercial leases do not permit these restrictions.
  • Assigning and subletting: Ask the landlord for the right to assign the lease or sublet the space to another tenant. The tenant is still responsible for paying the rent if the business fails or relocates. With an assignment or sublease agreement, the business can find someone else to cover the monthly rent.
  • Compliance with the Americans with Disabilities Act (ADA): Under the ADA, a business open to the public with more than 15 employees must be accessible to people with disabilities. The lease should determine who must make necessary alterations to the property and who must pay for these changes.

Things To Watch For

Although commercial tenants have fewer legal protections on the theory that they are more business-savvy than residential tenants, this isn't always true. Smart business owners will get legal advice when negotiating a commercial lease and before signing any lease agreement. Lessors and lessees need to address other factors in their commercial lease, including:

  • Pass-through costs: A so-called triple net lease allows the property owner to pass through the costs of owning and operating the building to the renters. Pass-through costs may include common area maintenance, utilities, and property taxes. Pass-through costs are helpful during rent negotiations, but business owners must look for them in the agreement.
  • Leased premises measurement: The tenant's obligations for rent and maintenance depend on the square footage of the premises. Legal issues often begin when the lease agreement is unclear about where those measurements begin. Tenants may believe the premises consist of the interior of the building, but some landlords measure from the outside instead.
  • Improvements and alterations: The lease agreement must clarify who is responsible for the initial build-out or load-in following the opening of the business. If the landlord must provide any materials or have the property in a particular condition before the new tenant moves in, make that clear in the agreement. The agreement must also clarify who handles any future alterations or maintenance.
  • Natural disasters and eminent domain: Almost no place in the country is safe from some kind of disaster. The landlord and tenant may each have insurance, but if the building is a loss or needs extensive repairs, that may not be enough. The lease must address what happens if the building needs renovations and the tenant must vacate.

When You Need Legal Advice

Small business owners consult attorneys with legal issues in employment or contract matters. Sometimes, they forget they need an attorney when leasing commercial real estate. A rental agreement is as much a contract as any purchase order. It can be easy to think a commercial lease is the same as the lease you signed for your apartment. Leasing a commercial space has a few extra wrinkles that need an attorney's review.

If you have any doubts at all, consider speaking with a real estate or commercial law attorney in your area. They can review your business lease for the terms and conditions described above and let you know whether there is anything you need to renegotiate.

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