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Important Commercial Lease Terms

As a small business owner, the commercial lease agreement you sign for your business rental is critical for your company. Review the individual clauses carefully because each one has the potential for major headaches if you don't understand what you're signing.

A common mistake for small businesses is failing to realize that a commercial lease is nothing like a residential lease. In a residential lease, tenants have legal protections and rights that commercial tenants do not have. The law assumes that commercial property is being leased by business owners who understand lease negotiations and will put all their wants and needs into the lease itself.

This is not always the case. If you're unfamiliar with the various types of commercial leases, have a legal professional review your commercial lease agreement before signing. A business law attorney or real estate attorney can give you legal advice on the nature of the lease.

Rent vs. Lease

Most people are familiar with a residential lease agreement. There is one monthly rental payment, some agreements about maintenance and security deposits, and perhaps some terms about parking and utilities.

commercial lease agreement is much more complicated. A commercial lease contains:

  • Agreements for the upkeep of common areas
  • Payment of operating costs
  • Exclusion of competing businesses
  • Ownership of fixtures

Unlike a residential agreement, you can negotiate a commercial lease. The base rent is a starting point for most of the terms and conditions below.

These are only descriptions of the terms, conditions, and clauses in a commercial lease. FindLaw does not recommend creating a commercial lease agreement template from this list alone.

Important Terms and Conditions in a Commercial Lease

Americans with Disabilities Act (ADA) compliance: A federal law that requires a building to comply with the ADA. The tenant and the landlord are responsible for making the property accessible to disabled persons. The tenant should ensure that the landlord makes this warranty based on an ADA survey or an audit performed by an engineer or architect.

Attorney fees and costs: Defines who must pay the expense of attorneys and court costs if there is a dispute or legal action. In some states, the fees and costs are set by statute.

Automatic rent increases: How much the rent may increase annually. The lease agreement should describe the monthly and yearly increases if the lease is for a fixed period, such as a five-year lease. See also escalation clause.

Defaults and remedies: Describes when either party is in default of the lease terms and the remedies the tenant or property owner has in the event of a default. Not all defaults have to do with nonpayment of rent. For instance, failing to repair the property within a certain time frame would be a default of terms.

Destruction or condemnation: In case of natural disaster, eminent domain, or other calamity, the clause specifies at what point the tenant may terminate the lease without penalty and if the landlord must attempt repairs in the event of a natural disaster. See also foreclosure and sale.

Dispute resolution: Specifies how the parties will handle disagreements. Many businesses want the parties to resolve disputes through either mediation or arbitration.

Escalation clause: Provides for increases in rent over a specified period of time. The escalation can be a fixed amount, an annual percentage, or based on the Consumer Price Index (CPI). CPI increases are usually capped at 3%.

Exclusive use: Restricts landlord or property owner's right to lease nearby space to businesses similar to the tenant's. Often found in large retail spaces like malls. Exclusive use clauses are very narrowly written. Clothing stores catering to teenagers next to clothing stores catering to business executives do not violate exclusive use agreements.

Expansion: Gives the tenant the right to add adjacent space or to move into a larger vacant space in the building.

Foreclosure and sale of property: Defines what happens if the landlord receives a notice of foreclosure on the property and the tenant's rights if served with a bank eviction notice.

Grace period: Allows the parties a period of time to comply with the lease terms. This clause may specify when the tenant must correct or cure a default in the rent.

Holdover tenancy: States the property owner's recourse in the case of a tenant whose lease has expired but who has not vacated the property.

Improvements and alterations: Specifies if the landlord must make any improvements, repairs, or alterations before the new tenant can take possession of the rental property. This clause should also state what happens if the property is not ready on the move-in date and what remedies the tenant has.

Insurance and liability: The tenant should include their insurance carrier's name and contact information for liability purposes.

Jurisdiction: Specifies which state laws will control if there is a dispute about the terms.

Landlord and tenant (lessor and lessee): Identifies the parties by their full legal names, states of incorporation, and principal business addresses.

Lease terms: The amount of monthly rent and additional payments made by the lessor. There are several types of commercial lease terms a commercial tenant may see:

  • Gross lease: The tenant pays only the base rent. This is not common in commercial agreements.
  • Net lease: Also called a modified gross lease. The tenant pays the base rent plus any one of these: tax, maintenance, or insurance.
  • Double net lease: The tenant pays base rent plus any two of tax, maintenance, or insurance.
  • Triple net lease: Also called an NNN lease. The tenant pays base rent and tax, maintenance, and insurance.
  • Percentage lease: Similar to a modified gross lease, but the tenant also pays a percentage of gross sales.

Leasehold improvements: States whether the tenant can make improvements to the property and if they become part of the property or if the tenant must remove them when they leave.

Maintenance and repairs: Specifies which party handles the maintenance and repair of which portions of the property. In most commercial real estate leases, the property owner is responsible for the exteriors and common areas, and the renter takes care of the interiors. Multiple renters may have to share the costs of interior common areas like lobbies and hallways.

Parking and access: In limited parking areas, as in a small office or strip mall, designates which spaces belong to the lessee. Defines shipping and delivery access if needed.

Premises: Gives a complete description of the property. The suite number, street address, city, state, and zip code are included. The premises description should contain the square feet in the space and if the square footage includes hallways, common areas, and lobbies.

Purchase option: States if the tenant can make a purchase bid at the end of the lease term. If there is a purchase option, the lease must state when the tenant must make such a bid or offer and to whom.

Renewal option: If the lease is not a year-to-year lease, it should state when it expires and if the tenant can renew. If there is a renewal option, the lease must say when the tenant must give notice and the rent amount during the renewal period.

Right of entry: States whether the landlord or property owner has a right of entry and under what conditions. In general, commercial landlords have no right of entry without written notice except during normal business hours.

Security: The lease agreement should spell out who will be liable for security at your commercial property. Otherwise, both sides will tend to believe that the other side is responsible. State law does not agree on who is responsible for security inside or outside a commercial space, so the lease must control.

Security deposit: States the amount of the security deposit. This provision should also state the reason for the security deposit and whether it will earn interest. Unless there are state laws to the contrary, the lease should also give a minimum time to return any unused deposit and a receipt.

Subletting or assignment: Gives the tenant the right to sublease or assign the property if the tenant cannot complete the lease term or wants to rent part of its space to someone else. This clause will specify under what conditions the tenant can avail themselves of this right.

Taxes: Specifies whether the landlord or tenant pays the property taxes. See also Lease terms.

Tenant "going dark" rights: Gives the tenant the right to close the store or receive a substantial reduction in the rent if a major tenant or several other tenants go out of business, i.e., "go dark." This clause is standard when leasing retail space in shopping malls.

Term of the lease: The duration of the lease agreement.

Termination date of lease: Specifies the lease's ending date. It should also state whether the tenant must return the property to its original condition.

Use of premises: Specifies any restrictions on the use of the premises.

Utilities and services: Specifies what utilities and services each party pays and the days and hours provided.

Warranty: Statement by the landlord that the leased premises comply with applicable laws.

Zoning: States the zoning laws or other restrictions that apply to the facility.

Get Legal Advice

These are not all the terms and conditions you may find in a commercial rental agreement. Before leasing any commercial space, review your negotiating options with a business law attorney in your area. Whether you're a startup looking for office space or a new business looking for a short-term lease in a storefront, a skilled attorney can make sure you get the best deal possible.

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