Commercial Lease Agreements: Everything You Need to Know
Whether you are signing your first lease or getting ready for a move or a renewal, you need to have a thorough understanding of commercial leases. Unlike residential leases, commercial leases are very much "buyer beware." Your rights are exactly as stated in the lease with little to no other protections.
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What Is a Commercial Lease?
A commercial lease agreement is a contract for a business to rent an office space or other business property from a landlord. The term 'commercial' simply means that the lease is for business activities rather than housing. A commercial tenant can be anyone from a sole proprietor with a small, growing business to a major multinational corporation.
How Is a Commercial Lease Different from a Residential Lease?
While the basic concepts and terms of a commercial lease are similar to a lease you might have signed for an apartment, there are still differences between commercial and residential leases that you need to be aware of. Residential leases are often highly regulated with some terms that cannot be changed by law—even if both parties agree to waive those terms. On the other hand, commercial leases have virtually no restrictions beyond basic contract law.
In addition, commercial leases are much more customizable. While most residential leases use virtually identical boilerplate language, you must carefully negotiate and review a commercial lease to ensure that it contains everything you think it does.
Do Commercial Tenants Get Any Legal Protections Outside of the Lease Agreement?
The differences between commercial and residential leases also carry into dispute resolution. A residential lessee might be able to rely on local housing laws and consumer protections to help protect tenants' rights. On the other hand, a commercial lessee generally has no rights other than what is explicitly stated in the lease agreement.
Some states do have a limited list of landlord disclosures or other required lease terms. These are generally limited to major public health and safety issues such as asbestos warnings or the use of the property for illegal activities.
What Are the Common Types of Commercial Leases?
There are several types of commercial leases beyond a simple flat monthly or annual rent arrangement.
- Net lease – The tenant pays all or part of taxes, insurance, or maintenance costs that would otherwise be incurred by the landlord in addition to the stated rent.
- Double net lease – The tenant pays taxes, insurance, and rent.
- Triple net lease – The tenant pays taxes, insurance, maintenance, and rent.
- Percentage lease – The rent is based on a specified percentage of the tenant's sales or profits.
- Fully-serviced lease – The rent includes utilities and other services that the tenant would generally pay for separately (common in office buildings with multiple tenants).
The lease agreement should state the type of lease and the basis for calculating rent. The above terms are standard arrangements but, like other parts of a commercial lease, are subject to negotiation.
What Are the Other Important Terms in a Commercial Lease?
There are other items that are commonly included in a commercial lease. While most are fairly standard, they only apply if they are included in the lease during negotiations with the landlord.
Basic terms include the following:
- Lease term – How long is the lease? Will it end on a fixed date or subject to conditions? Does either the landlord or tenant have an option to extend it or cancel early?
- Rent – How much is the base rent? Does it increase at set time periods? What other charges are included in addition to rent?
- Other costs – Who pays for items such as building insurance, property taxes, and routine maintenance?
- Security deposit – How much is it, and when may the landlord withhold it?
The lease may also specify the allowed uses of the property.
- Permitted use – The lease is only for specified commercial activities. The tenant may not engage in other types of business activities without permission of the landlord.
- Exclusive use – The tenant gets the exclusive rights to perform certain activities within a larger property with many tenants. For example, a coffee shop in a strip mall or a tax accountant in an office park may negotiate for exclusive use to avoid competitors moving in next door.
Maintenance and Renovations
In a commercial lease, the landlord is generally responsible for routine maintenance such as HVAC repairs or outside landscaping. However, the lease may place all or part of this responsibility on the tenant.
One important thing to consider is cleaning services. This is a balance of convenience—especially in an office tower where the landlord provides janitorial services to all tenants—versus possible security concerns of having outside personnel coming into the business. Of course, including this term within the lease helps to avoid disputes.
Renovation provisions are also common within commercial leases. Office tenants may need to move walls, restaurants may want to have a certain layout, and manufacturers may need to bring in special equipment. The tenant must have permission to do so under the lease. The lease should also specify who will pay for renovations. It is a common lease concession for the landlord to pay for an initial renovation to make the property suitable for a long-term tenant.
Because the landlord owns the building, they will often carry insurance in case of fires, floods, or other disasters. However, some commercial leases pass this cost directly on to the tenant rather than including it within the rent.
Tenants will generally want to obtain liability and personal property protections for themselves. In some cases, the landlord will require these policies to protect the landlord from being added to a claim against the tenant.
The lease should also spell out signage and similar rights.
- Is the tenant allowed to erect a sign, and who pays the costs?
- Does the tenant have the right to be included in a building directory?
- What happens if the landlord decides to modify or remove a directory or exterior signs?
Americans with Disabilities Act
The Americans with Disabilities Act (ADA) requires business spaces that are open to the public to be accessible to those with disabilities. The law's requirements depend on the size of the business, the type of business, and the age of the building or time since it was last renovated.
Tenants have primary responsibility for ensuring their business is ADA compliant. However, they may wish to negotiate for a lease that requires the landlord to make ADA upgrades or to maintain ADA compliance, such as continued elevator access.
Even if the tenant has a corporation or LLC, the landlord may require that the tenant personally guarantees the lease as a condition of signing. If the tenant accepts this term, they are personally liable for any rent or other charges that the corporation or LLC is unable to pay even if it goes out of business.
A commercial lease can contain virtually any other term that both the landlord and tenant agree to. Generally, anything included in a commercial lease is enforceable unless it is illegal or the term is too vague for a court to enforce it.
What If the Landlord Wants to Change the Lease?
The landlord usually does not have the right to amend the lease on their own. To make changes, they would typically need to wait until the next renewal or offer the tenant something to get them to agree to the changes.
The primary exception would be if the lease itself contains some sort of option. For example, the landlord might include a clause that allows them to terminate the lease if they sell the property.
In short, any changes need to have the tenant's signature either as an amendment or as an option they agreed to within the original lease.
What If the Tenant Wants to Change or Get Out of the Lease?
Just like tenants have the right to expect their landlord to follow the lease, the landlord also has the right to expect tenants to follow the lease. There are, of course, exceptions to the rule.
Breaking a Lease
If the business is struggling or needs to move into a different space, the tenant may consider terminating the lease. If they do so, the landlord may have the right to sue the tenant for the remaining rent due on the lease. In some states, the landlord may have a duty to mitigate that requires them to try to re-rent the space and offset the rent they receive against the damages that the tenant owes.
Tenants' legal obligations may vary based on how they signed the lease. For example, a sole proprietor might have full personal liability, while if the lease was under a failed corporation, the landlord would only be able to make a claim against any remaining corporate assets.
Tenants may also have the right to sublease the commercial space to a new tenant. The original lease may prohibit or restrict subleasing. If it does not, tenants are generally allowed to sublease.
Under most lease agreements, original tenants are responsible for any term in the original lease not covered by the new tenant plus any defaults by that new tenant. That is, if the sublessee does not pay rent, the original tenant would have to pay the landlord.
Another option is to assign the lease to the new tenant and get the landlord to agree to release the original tenant. This is a more difficult process because the landlord will want to more thoroughly vet the new tenant before waiving any future liabilities.
If the tenant and landlord can come to a mutually beneficial agreement, tenants may also be able to modify the existing lease. This is essentially a new lease even though the modified lease agreement may refer back to the original lease.
What Happens If There Is a Dispute about the Lease?
In the event of a lease dispute, the resolution process depends on the type of dispute.
If the tenant does not pay rent or pays late, the landlord will generally be able to take collections action or begin eviction proceedings. Tenants should be aware that commercial evictions are often much faster and have fewer protections than residential leases. In addition, the landlord may have the right to change the locks prior to going to court if the tenant has not paid rent.
Disputes about Lease Terms
Disputes about lease terms often arise when the landlord and tenant cannot agree on who is responsible for a specific item. Often, this occurs when a provision in the lease was too vague or did not clearly include something that a party thought it did.
Many commercial leases include an arbitration clause for resolving these types of disputes. An arbitration clause requires the parties to use and accept the decision of an arbitrator rather than filing court proceedings.
How to Create a Commercial Lease Agreement
While there is a lot that goes into a commercial lease, you do not have to reinvent the wheel. Click here to create your commercial lease agreement and begin tailoring it to your needs.