A Commercial Lease is a contract between a landlord and a tenant that allows the tenant to operate a business on the landlord’s premises for rent.
Commercial Lease vs. Residential Lease
A commercial lease agreement is a contract for the right to use commercial property for conducting business, whereas a residential lease agreement is a contract for the right to use residential property for living.
While similar at their core, commercial leases and residential leases differ in at least a few significant ways:
- Legal protections. Tenants of commercial leases are considered to be on equal footing with their landlords. Commercial leasing is usually a business-to-business transaction, and business tenants tend to have more resources to negotiate and bargain with landlords. Residential tenants usually aren’t as resourceful as business tenants. Thus, more laws are in place to protect them.
- Customization. Residential leases are fairly standardized because tenants use the property for the same purpose. There are far more things to consider with a commercial tenant, such as business-specific modifications, parking, the ability to put up signs, what type of activities is allowed on the property, etc. Different businesses can have unique business needs. Commercial leases must be flexible and highly customizable for each tenant.
- Lease termination. Breaking a commercial lease is far more difficult and costly than breaking a residential one because there are fewer legal protections for business tenants, and the financial ramifications for a landlord are usually sizable.
- Repairs/Maintenance. Commercial lease tenants commonly bear the costs of property maintenance and repairs, whereas residential tenants usually do not.
What Terms Should A Commercial Lease Include?
You should understand the terms in your commercial lease agreement to ensure a smooth process between the landlord and the business tenant. Keep in mind that you should find professional advice to help you draft and review the agreement.
Now, let’s review the important terms a commercial lease should include:
- Rent amount/Base Rent. The minimum base rent the business tenant must pay to use the property.
- Additional Rent. Depending on the terms of the lease, a business tenant may be required to pay an amount in addition to the base rent to cover a portion of the property’s operating expenses.
- Operating Expenses (Op/Ex). Incidental costs associated with running the property, including insurance, property taxes, maintenance, utilities, etc.
- Security Deposit. Money paid to the landlord upfront and held by the landlord for the lease term used to cover any breach of lease obligations, such as damages to the property. May be refundable or non-refundable, depending on the lease.
- Common Area Maintenance Charges (CAM). Part of Op/Ex. An additional charge to the tenant for maintenance of the property’s common areas.
- Usable Square Feet. The square footage of the area that the tenant will occupy.
- Rentable Square Feet. The usable square feet plus the tenant’s proportionate share of the common areas.
- Permitted Use. A clause in the lease agreement outlines the types of activities the tenant is allowed to engage in on the property.
- Expansion Rights. A negotiated lease term allows the tenant to expand the lease area.
- Option to Buy. A negotiated lease term gives the tenant the option to purchase the property at the end of the lease.
- Termination. Agreed circumstances under which the lease can be terminated and the notice required for termination.
- Renewal Options: Specifications and conditions for lease renewal or extension to apply to a specified period.
- Subletting: A clause specifies whether subletting is allowed and, if so, under what conditions.
- Insurance: A clause specifies the required coverage, like property damage and liability coverage, insurance limits, and who is responsible for insurance.
- Assignment: A clause specifies if the lease assignment is allowed, and if so, details the landlord’s and the tenant‘s rights and obligations in the event that the business tenant seeks to “assign” the lease.
Types of Commercial Leases
Although they’re wholly flexible and can be tailored to almost every business need, commercial leases usually fall into four common types:
- Gross lease. Also known as the full-service lease. The tenant pays one flat rental fee. The landlord covers all or most other expenses. A modified gross lease requires the tenant to pay a proportionate share of certain operating expenses in addition to the base rent.
Net lease. The opposite of the gross lease. The tenant pays base rent plus operating expenses. Three common subcategories of net leases include:
- Single (N) net lease. The tenant pays base rent plus one category of operating expenses.
- Double (NN) net lease. The tenant pays base rent plus two categories of operating expenses.
- Triple (NNN) net lease. The tenant pays base rent plus three categories of operating expenses. A bondable triple net lease requires the tenant to be responsible for base rent plus all expenses, including damage and loss from unforeseeable events.
- Percentage lease. The tenant pays base rent plus a share of its business profits.
- Variable lease. The tenant pays rent based on certain milestones or changes in circumstances after the commencement of the lease.
A start-up tenant with low funds may find the percentage lease more favorable, while an under-qualified or high-risk tenant may find themselves in a variable lease or a bondable triple net lease, as their choices are limited.
What Costs Go Into a Commercial Lease?
Renting a commercial property can get expensive. In addition to paying rent, you may be responsible for additional costs, including:
- Insurance. A commercial property insurance policy covers damage and loss to property from certain unforeseeable events, such as fire, theft, natural disasters, etc. The average small business will pay between $1,000 to $3,000 per year for coverage.
- Property taxes. Taxes paid to the state and/or municipality for property owners are assessed as a certain percentage of the property’s market value. You may be asked to pay a share or all of the property taxes.
- Maintenance. Costs associated with the upkeep of the commercial property’s interior and exterior. Depending on the lease terms, you may also be responsible for a portion of the maintenance costs of the property’s common areas.
- Repairs. Costs of repairing broken equipment and/or damage to property.
- Security. Depending on the property and the nature of your business, you may need to invest in a security system or hire security guards.
- Parking. Most commercial lease agreements will include parking spaces. But if none are included, or you need more, adding parking can cost thousands.
- Local nuisance laws. If your business emits noise, scent, or other matter that runs afoul of local laws against nuisance, you may be subject to fines or other penalties.
- Utilities. Includes gas, water, electricity, sewer, trash collection, etc. Depending on the property and the lease agreement, you may have to pay for your utilities or a portion of the entire property’s total utilities.
- Modifications. Costs associated with interior or exterior adjustments you make to the property to fit your business needs.
To get a complete picture of the costs involved in a commercial lease, don’t forget to consider and forecast costs beyond just the monthly rental payment.
Commercial Lease FAQs
When is a commercial lease agreement most commonly used?
Landlords can use commercial lease agreements to rent any business-related property including:
- Accounting Firm
- Medical Clinic or Health Care Facility
- Shopping Mall Store
In addition to traditional businesses, commercial leases are also for renting private land.
What are landlords and tenants responsible for in a commercial lease?
Typically, the landlord handles structural repairs, ensuring the leased premises are usable.
For instance, the landlord is responsible for fixing the walls, roof, foundation, and other structural elements holding the premises together.
In contrast, the tenant is responsible for repairing and maintaining mechanical and decorative features, such as plumbing and windows.
How long do commercial leases last?
On average, most commercial leases last three to five years and can last anywhere from one to ten years, although short-term leases are less common.
Most landlords want to build long-term relationships with their tenants, so they prefer leases that last at least three years.
Where can I get a commercial lease form?
To create a commercial lease agreement, you can have a lawyer draft one or do it yourself using our commercial lease agreement builder and free template.