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. Commercial real property refers to non-residential property used to rent property for business or profit-generating activities. 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. A commercial lease agreement clearly defines each party's rights and responsibilities.
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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. Commercial property refers to non-residential spaces used for business activities. The term ‘commercial’ simply means that the lease is for business activities rather than housing. Commercial leases are used to rent property for business purposes. A commercial tenant can be anyone from a sole proprietor with a small, growing business to a major multinational corporation.
It is important that the lease agreement clearly includes the landlord's and tenant's details, such as their business or operating names, to ensure transparency and accountability.
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. Commercial leases are highly negotiable and parties can customize rent, maintenance, and improvements to suit their needs. Parties can customize rent through negotiation, allowing for tailored rent structures such as base rent plus additional costs.
It is essential to have a written lease to clearly outline all agreed-upon terms and protect the legal interests of both parties.
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. Tenant protection and habitability standards, which ensure safe and livable conditions, are primarily found in residential leases, while commercial leases offer minimal or negotiable protections. 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. Commercial lease agreements should also clearly outline the tenant's rights and obligations, as well as the landlord's and tenant's rights, to ensure both parties understand their legal responsibilities and entitlements.
What Are the Common Types of Commercial Leases?
There are several types of commercial leases beyond a simple flat monthly or annual rent arrangement. Commercial leases can be used for retail, office, or industrial spaces, each with unique requirements. Lease structures can be categorized as gross, net, or triple net, and understanding these distinctions is essential when creating a commercial lease.
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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.
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Double net lease – The tenant pays taxes, insurance, and rent.
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Triple net lease – The tenant pays taxes, insurance, maintenance, and rent.
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Percentage lease – The rent is based on a specified percentage of the tenant’s sales or profits.
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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).
A full service lease is a type of gross lease where the rent payment is comprehensive, covering most or all operating expenses, including property taxes, insurance, CAM, and utilities. In this arrangement, the tenant pays a flat rental fee, also known as gross rent, and the landlord is responsible for most additional costs. This structure simplifies budgeting for tenants and places the responsibility for operating expenses on the landlord, distinguishing it from net or triple net leases.
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.
When discussing lease terms, note that a fixed-term lease has a set start and end date, providing stability for both parties and limiting the ability to alter key conditions like rent during the lease period.
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:
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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?
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Rent – How much is the base rent? Does it increase at set time periods? What other charges are included in addition to rent? The agreement should clearly outline rent costs and deposits, including security deposits, to ensure both parties understand the financial obligations.
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Other costs – Who pays for items such as building insurance, property taxes, and routine maintenance?
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Security deposit – How much is it, and when may the landlord withhold it? Security deposits serve as a financial safeguard for the landlord and should specify the amount, purpose, and handling procedures within the commercial lease agreement.
The lease may also specify the allowed uses of the property.
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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.
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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.
A commercial lease agreement defines each party's rights and responsibilities regarding the rental property, including obligations related to rent, maintenance, property use, and dispute resolution.
Clearly outlining each party's rights in the commercial lease agreement helps prevent disputes and ensures smooth operation for both landlords and tenants.
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. Maintenance, improvements, and termination terms are key elements that can be negotiated and customized in a commercial lease, allowing both parties to define who is responsible for property upkeep, repairs, and the conditions under which the lease can be terminated.
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. Parties can also customize rent, maintenance, and improvements to suit their business needs, ensuring flexibility in the agreement.
It is important to clearly outline parties' responsibilities and improvements in the lease agreement to avoid misunderstandings and disputes.
Insurance
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. Property insurance is a key responsibility that may be assigned to either the landlord or tenant, depending on the lease type, such as in triple net leases where tenants are typically responsible for property insurance. Responsibilities in commercial lease agreements, including tenant responsibilities in commercial leases, should be clearly defined regarding insurance coverage to avoid confusion about who maintains and insures the property.
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.
Exterior Appearance
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.
Personal Guarantee
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.
Other Terms
A commercial lease can contain virtually any other term that both the landlord and tenant agree to. It is important that tenants follow agreed-upon terms to ensure smooth operation and avoid disputes. 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. The lease should also outline procedures for handling defaults and enforcement notices, as well as the process for signing the agreement.
Calculating Lease Costs
Understanding how to calculate lease costs is essential for any business considering a commercial lease. Unlike residential leases, commercial leases often involve a variety of expenses beyond just the base rent. The total cost of leasing a commercial property can include rent payments, operating expenses, property taxes, insurance fees, and maintenance or repair costs. The specific costs you’ll be responsible for depend on the type of lease you sign.
For example, with a triple net lease, the tenant is responsible for paying not only the base rent but also all operating expenses, including property taxes, insurance fees, and maintenance costs. This means that, in addition to their rent, tenants must budget for these extra expenses, which can fluctuate year to year. In contrast, a gross lease typically involves a fixed rent payment, with the landlord covering most or all of the operating expenses, including property taxes and insurance.
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. Most commercial lease agreements are for a fixed term, meaning they have a set start and end date. After the fixed term expires, the lease may transition to a month-to-month lease depending on the agreement and local laws. There are, of course, exceptions to the rule.
Using a commercial lease agreement template can help ensure all necessary terms are included and legally compliant.
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.
Commercial Subleasing
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.
Modification
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.
Mitigating Risks in Commercial Leases
Mitigating risks in commercial leases is a critical step for both landlords and tenants to ensure a smooth and successful rental relationship. One of the most effective ways to reduce risks is to clearly define each party’s rights and responsibilities within the commercial lease agreement. This includes specifying who is responsible for rent payments, operating expenses, property taxes, insurance fees, and repair and maintenance costs.
For tenants, it is important to thoroughly review the lease agreement and understand all obligations, especially regarding property taxes, insurance fees, and maintenance duties. Negotiating key terms—such as the lease term, rent escalation clauses, and termination provisions—can help protect your interests and provide flexibility if your business needs change.
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.
Non-Payment
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
When creating a commercial lease, it is important to understand the process and the key terms involved. Using a commercial lease agreement template can simplify the process and ensure all necessary terms are included. 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. A well-drafted commercial lease agreement is essential for renting out commercial rental property.