Your Go-to Guide to Commercial Leases

Katie Fleming

Katie Fleming

Co-founder and COO of Owner Actions

A person holds and reviews a document on commercial leases

If you choose to rent a storefront or commercial property, you may be required 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 are commercial leases?

Commercial leases are legally binding documents drafted to protect the building owner and ensure that 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 does it differ from a residential lease?

Commercial leases differ from resident agreements in five key 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 provisions that promise 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 obligation

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
exterior signage

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

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These elements are addressed in almost every lease agreement you’ll encounter, but how they’re handled depends on the type of lease you’re given.

In the following list, you’ll find several common kinds of leases you might encounter and the nuances that make them unique:

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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?

Every part of the agreement is important and should be read thoroughly before consenting 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 clauses can impact your business and operations in significant ways. These include:

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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

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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 magnitude 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

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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. Attorneys can help you review the terms and conditions of the 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.

 

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What’s next?

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