If you choose to rent a storefront or commercial property for your business, you may need to sign and abide by a commercial lease agreement. In this article, we’ll explain what commercial leases are, and we’ll help you understand their key terms, identify red flags, and recognize areas of opportunity for negotiation.
What is a commercial lease?
A commercial lease is a legally binding document drafted to protect the property owner and ensure that business tenants follow the terms the owner wants occupants to abide by. These documents define the terms, restrictions, protections, and covenants that will be enforced between the two parties.
How do commercial leases differ from residential leases?
Commercial leases differ from resident agreements in five important ways:
Commercial leases don’t follow a standard form.
Landlords can create custom agreements that meet their specific needs, provided they adhere to federal, state, and local regulations.
Consumer protection laws rarely apply.
Residential leases are required to include protections for consumers, but in most cases, these protections don’t extend to commercial leases.
Commercial leases are long-term.
While residential leases tend to be month-to-month or year-to-year, commercial leases tend to be multi-year and difficult to break mid-term.
There is more room for negotiation.
Commercial tenants can be difficult to come by, especially for unique spaces. Because of this, landlords are often willing to offer discounts, amenities, allowances, and adjustments to standard terms that will entice a prospective tenant to sign.
They offer flexibility.
Commercial tenants often need spaces that can be adapted to suit style or functional requirements. Landlords are usually willing to accommodate their tenants’ needs at a cost to the tenant. However, some landlords may be willing to share in value-add costs.
What can I expect to find in my lease agreement?
As mentioned, agreements don’t follow a standard form. However, most commercial leases include the following terms:
The lease term
Terms for renewal
Rent inclusions, such as utility costs, property taxes, maintenance expenses, and insurance premiums
The security deposit fee and the conditions for its return
Specifications of the space being offered
Conditions and limitations for site improvements
Rules for interior and
Assignments of dedicated parking spaces
Assignment of responsibilities for internal, external, and systems repairs
Restrictions regarding assigning or subleasing the unit to another tenant
Procedures for dispute resolution
Options for termination
Penalties for early termination
Procedures for eviction
These components are addressed in almost every business lease agreement you’ll encounter, but how they’re handled depends on the type of property lease you’re given.
Here are some common kinds of leases you might encounter and the nuances that make them unique:
Landlord’s financial responsibilities
Tenant’s financial obligations
Single net (N) lease
|Building insurance costs, maintenance, and utilities||Base rent payment plus the property tax owed on the space|
Double net (NN) lease
|Building maintenance costs and utilities||Base rent payment plus property taxes owed on the space and an allotment of the costs of building insurance|
Triple net (NNN) lease
|Limited||Base rent payment plus property taxes owed on the space, an allotment of the costs of building insurance, unit maintenance and repair costs, and utilities|
Bondable net lease
|Limited||Base rent payment plus property taxes owed on the space, an allotment of the costs of building insurance, unit maintenance and repair costs, utilities, and the responsibility for covering structural rebuilding and repair costs (with continued rent payments) related to any defined scenario|
Full-service gross lease
|Property taxes owed on the space, building insurance, repairs, maintenance, and utilities||Base rent payment|
Modified gross lease
|Property taxes owed on the space, building insurance, repairs, maintenance, and utilities||Base rent payment that may increase as the building’s operational costs rise|
Percentage gross lease
|Property taxes owed on the space, building insurance, repairs, maintenance, and utilities||Base rent plus a percentage of the tenant business’s gross income|
Which parts of the agreement deserve a closer look?
Of course, every part of the agreement is important and should be read thoroughly before you agree to its terms. However, there are a few key points you should pay close attention to before choosing to proceed:
- How and in what scenarios rent increases may occur and how those increases will be calculated
- Who has ownership of the various forms of improvements that may be made to the space
- Whether competing businesses may set up shop in the same building or plaza
- Whether the term of the lease is suitable for the growth you forecast for your business
- The penalties you may face for breaking the lease
- Whether the lease renews automatically, has a fixed end date, or includes options for extension
- What the security deposit covers and the conditions that must be met for its return
- How and where disputes must be handled
Are there any red flags in commercial leases I should watch out for?
Yes. Some often-overlooked property lease clauses can impact your business and operations in significant ways. These include:
|Use clauses limiting your ability to change parts of your business without the landlord’s consent|
|Defined limits to property improvements|
|The absence of clauses promising timely repairs or maintenance|
|The absence of clauses assuring environmental safety, especially those that prevent others from storing hazardous materials on site|
|Vague terms about the fees and expenses tenants must pay|
|Vague definitions of the landlord’s responsibilities, especially for systems maintenance and repairs|
|Real estate tax escalation clauses that force you to pay a fixed percentage of real estate tax increases|
|Frequent reviews of rent that could cause rapid increases|
|A lack of clarity on rent payment grace periods and how many rent payments you can miss before eviction procedures begin|
|Personal guarantees that make you personally responsible for rent if your business cannot cover it|
|Lease termination clauses that are overly punitive or costly|
|Sublease clauses allowing the landlord to share in the spread between what you owe and charge others for using the space|
|.Personal-to-assignor lease options that aren’t transferrable to buyers or anyone subletting your unit|
|Recapture clauses allowing the landlord to reclaim the property when you sell your business, reducing the appeal of the business for potential buyers|
|Demolition clauses allowing the landlord to terminate your lease and force you to vacate in a relatively short period of time to tear down the building and take advantage of a redevelopment opportunity|
|The absence of non-disturbance clauses that ensure you retain your space if the building goes into bankruptcy or foreclosure|
|Escape clauses that allow new building owners to void current leases and reissue them with a new set of terms|
|Relocation clauses that can force you to relocate your business to another unit within the landlord’s property|
|Verbal promises on any term of the lease that aren’t documented in writing|
The inclusion (or absence) of these clauses should cause you some concern. However, many can be negotiated for more favorable terms or, in some instances, eliminated altogether.
How much of my lease can be negotiated?
Practically speaking, almost all the terms of your lease can be negotiated, but your odds of success depend on the flexibility of the landlord, the temperature of the real estate market, and the size of your asks. For instance, big asks for spaces in high demand are far less likely to be agreed to than minimal asks for the same spaces or bigger asks in sites with many openings.
Some of the requests you might consider making include:
- A short-term reduction in rent as you get settled into your space
- Assurance that the rent won’t increase beyond the stated rate within the first year
- A shortened initial lease term with multiple options for renewal
- Improvements to the site (such as ADA accommodations, better lighting, fresh paint, new flooring, or better built-in security features) that will add value to the site for both you and the property owner
- Extra parking spaces dedicated to your business
- Options for bigger signage for your property
- The ability to sublet the space, which can help you cover the unit’s costs as you grow into the space, as well as when you outgrow the space and are unable to break the lease without facing penalties
You can handle many of these asks by communicating directly with the landlord, but many small business owners prefer to relegate negotiations to an attorney who is experienced in tenant terms.
Do I need an attorney?
In most cases, yes. Business attorneys can help you review the terms and conditions of the property lease and find illegal terms or red flags that may indicate the potential for problems. They can also be helpful resources when working through negotiations because they know which terms landlords are likely to bend on and where they’re more likely to hold firm.
There are many considerations you should keep in mind when choosing a location for your business. We have articles and advice that can help you with every action you need to take. Log into your owner’s portal for free, personalized guidance that will help you make your location search a success.