A commercial lease agreement is a contract between a landlord and a tenant that allows the tenant to operate a business on the landlord’s premises for rent.
If the tenant plans to operate a business on the landlord’s property, this document allows both parties to formalize that agreement and their relationship through a legally recognized and binding contract.
Commercial lease agreements are also known as:
- Business Leases
- Industrial Leases
- Office Space Agreements
- Standard Commercial Leases
How is a commercial lease different from a residential lease?
Unlike a residential lease agreement, a commercial lease agreement is intended for business purposes rather than for residential living. The leased property can be a simple office, an entire building, an independent retail store, a new restaurant, or even a large warehouse for industrial purposes such as a manufacturing factory or self-storage facility.
If the leased property is a part of a larger building, the landlord may address unique concerns and duties about common areas such as parking spaces or garbage disposal.
How Does a Commercial Lease Agreement Work?
A commercial lease outlines the rights and responsibilities of a landlord who owns a business property and a tenant who wants to rent the space to use for business purposes.
The agreement identifies the base rent the tenant owes each month as well as other possible fees like operating costs, taxes, maintenance, and parking. Depending on the individual lease agreement, some tenants will be responsible for more of the operating costs and upkeep of the business property than others.
As long as the tenant meets all the requirements outlined in the commercial lease agreement, they’ll be free to use the property to conduct business.
What are the Four Types of Commercial Lease Agreement?
There are four main types of commercial lease agreements based on how the tenant pays base rent and operating expenses.
Full Service or Gross Lease
In a full service or gross lease, the rental rate includes all property operating expenses. Operating expenses such as utilities and maintenance and real estate taxes are already factored into the rent. However, the landlord can add clauses to reserve the right to pass down any future increases in operating expenses to the tenant.
Net Lease
In a net lease, none of the operating expenses are included in the rental rate. Therefore, in addition to the base rent, the tenant must also pay its pro-rata portion of the three “net” operating expenses – property taxes, property insurance, and common area maintenance (CAM). CAM also includes common area utilities and operating expenses as well. The different types of net leases include:
- Triple Net Lease – the tenant pays a portion of the property taxes, property insurance, and CAM
- Double Net Lease – the tenant pays a portion of the property taxes and property insurance
- Single Net Lease – the tenant pays a portion of the property taxes
Modified Gross Lease
A modified gross lease (or modified net lease) is a hybrid of a gross lease and a net lease. In a modified gross lease, the operating expenses are negotiated and shared between the landlord and the tenant. Usually, the tenant is responsible for the base rent and CAM, and the landlord handles the property taxes and property insurance. Sometimes, the tenant pays base rent only at the beginning of the lease and then pays a portion of the operating expenses later.
Percentage Lease
In a percentage lease, the tenant pays the base rent on the property and a monthly percentage of the gross revenue from the business operating the rented space. This type of lease is typically used for retail businesses.
How to Send a Commercial Lease Agreement
After you’ve finished writing your commercial lease agreement, save it as a PDF to finalize it and email it to the other party to sign. You can also print it out to sign in person.
Check out our commercial lease agreement template to start creating your commercial lease agreement.
Do I Need to Get a Commercial Lease Agreement? What Happens if I Don’t?
Even if you can legally rent a business property without a lease agreement in your state, you take a big risk by not creating a written commercial lease agreement. The agreement helps you clearly define all the terms of the lease and have proof of exactly what you and the other party agreed upon in case a dispute arises.
Keep in mind that in many situations, it’s illegal to run a business out of a rental property using a residential lease agreement.
If you have any questions about the terms of your commercial lease agreement, talk to the other party or seek legal advice.
When is a Commercial Lease Agreement Most Commonly Used?
Commercial lease agreements can be used to rent any space that will be used for business purposes, such as:
- Accounting Firm
- Factory
- Medical Clinic or Health Care Facility
- Restaurant
- Shopping Mall Store
- Warehouse
In addition to traditional businesses, commercial leases can also be used to rent out private land.
Related Questions / FAQs
Here are some of the most commonly asked questions about commercial lease agreements:
What is a landlord responsible for in a commercial lease?
Typically, the landlord handles structural repairs, which means they make sure the leased premises is 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 repairs and maintenance of mechanical and decorative features, such as plumbing and windows.
Where can I get a commercial lease agreement?
To create a commercial lease agreement, you can have a lawyer draft one for you or you can do it yourself using our commercial lease agreement builder and free template.
What is the most common commercial lease?
The most common commercial lease is the percentage lease, which is often used in shopping and strip malls. This type of commercial lease charges the tenant base rent plus a percent of their monthly sales.
How long do commercial leases last?
On average, most commercial leases last three to five years. They 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.
Does ADA apply to commercial leases?
Yes, if the commercial property tenant is operating a business open to the public and hires more than 15 people, the Americans with Disabilities Act (ADA) applies and requires that doors be widened and ramps be installed. Learn more about who’s responsible for ADA compliance, and be sure to memorialize your decision in writing.
