Industry jargon. Commercial real estate is chock-full of it. Whether you have negotiated a commercial lease before or it’s your first time, chances are you will run into some potentially... Read More
Updated November 2022
While you likely have familiarity with leases when it comes to residential property, fewer people have experience dealing with the ins and outs of commercial leasing. In this article, we’ll cover all the aspects of commercial leases, from what they entail, to negotiating them, to how they differ from residential leases and more.
Keep reading to learn more about commercial leases.
What is a commercial lease?
A lease agreement, which can vary in length from a few to many pages long, is what a landlord or a broker will hand you when you’ve decided you want to rent their space. It is an official contract signed between a landlord and tenant that details the terms of the rental agreement.
Potential tenants will likely find the most key provisions of this agreement on the first page. That will include the specific address of the property, the monthly payment that you are responsible for, the amount of the security deposit you will have to supply, and the length of the rental period (referred to as the lease term).
Types of commercial leases
Commercial leases take several different forms, and the kind of property or commercial space you are looking for will affect the kind of lease agreement you are given. Some of the most commonly used types of commercial leases are:
- Full-service gross leases: In this lease type, the landlord pays all operating expenses, and the tenant pays rent and utilities.
- Double-net leases: With a double-net lease, tenants pay rent, utilities, and their proportionate share of property taxes and insurance. Landlords are on the hook for building maintenance.
- Triple-net leases: With a triple-net lease, tenants are responsible for rent, utilities, and their proportionate share of building operating expenses. Landlords take care of base building maintenance and repairs.
Other lease types include single-net leases, modified gross leases, and absolute leases.
Details and terms of commercial leases
After that first important page of the lease agreement, tenants will likely find several other pages that spell out the various terms they are agreeing to. There may be clauses inserted into the lease agreement about rent stability or preferential rent (i.e., when you are receiving a lower rental rate than what the landlord is legally permitted to charge). There might also be pages that explain certain rights that you have as a tenant, such as being able to request that the landlord put in window guards or other safety measures. It’s key to go over these details with your tenant broker to ensure you have a full understanding of what you are signing.
Is a commercial rental agreement binding?
Each party who signs the lease is bound by the terms of the agreement. However, there can be exceptions. Here are some options:
- Negotiating a lease takeover: This is a way for you to pass on the remainder of your lease to a new tenant.
- Terminating your lease: This is not necessarily the most cost-friendly way to get out of your lease – if the lessee wants to break the lease before the end of the rental period, the property owner can usually apply penalties, perhaps even forcing the tenant to continue paying each month until the end of the specified lease length. There are ways you might be able to shorten your commercial lease or mitigate costs.
- Subleasing your office: Sometimes, a landlord is willing to work with the renter on a better solution – for instance, if the lessee is able to find another tenant to take the space until the end of the lease.
Commercial leases vs. residential leases
A lease for a home or apartment is usually quite a bit different than a commercial lease. Here are the primary differentiators:
- Lease term: Residential leases tend to be for one or two-year periods. For commercial leases, two or three years would be considered short, with five or 10-year-long leases being more typical for commercial properties.
- Costs: Residential lease agreements lay out the monthly rent as the only significant financial responsibility for the lessee. The landlord is expected to handle most other expenses related to the property, such as building maintenance, landscaping, and fixing problems within the home (plumbing, lighting, etc.). A commercial lease usually shows that the lessee has more financial responsibilities than just the monthly payment. Depending upon the exact type of lease, the agreement may be written out to show that the lessee is also required to pay for insurance, taxes, and maintenance costs for the building.
Negotiating terms in a commercial lease
When a landlord first presents a potential tenant with a rental agreement, the lease as it is currently written is not necessarily set in stone. The tenant may be able to get the property owner to negotiate certain lease terms. For example, in a commercial real estate transaction, if the landlord wants the tenant to be responsible for the maintenance of the property, but the tenant doesn’t like that requirement, they might be able to negotiate a higher monthly rental payment in lieu of covering maintenance.
The goal is to find an agreement that both parties (lessor and lessee) are comfortable with. If real estate is scarce in the particular area that the tenant is seeking, then the property owner might have the upper hand in negotiations. On the other hand, if the market is currently favorable to renters, then the tenant might be able to get the lessor to negotiate down on costs or responsibilities.
A few key things to look out for in commercial lease negotiations are:
- Tenant improvement allowances: A tenant improvement allowance is funding (either full or partial) the landlord provides you to modify your office (a process known as buildout) to suit your company’s needs. Your broker can help you negotiate these funds.
- Base year expenses: These are costs that you pay in the first year of your rental agreement that determine how much you will pay in subsequent years. Make sure to read your lease carefully to understand what you’ll be on the hook for after your first year of tenancy.
- Subleasing rights: If you think you might need to sublease your office in the future, you’ll want a sublease clause in your lease. There can be specific restrictions even when your lease permits you to sublease – for example, you may only be able to sublease your space to certain industries.
These are just a few of the many terms that can be negotiated in your commercial lease, which is why it’s crucial to review your lease with an experienced professional.
Do I need representation before signing a lease?
Every day, people sign leases for houses and apartments without having a lawyer or real estate professional examine them first. Most of these rental agreements are uncomplicated enough that an average person can read through them and understand them well enough to sign the contract with confidence (but do be sure to read the whole thing before signing!).
But a rental agreement for a commercial space may be a great deal more complicated and more consequential in terms of specific financial responsibilities. Therefore, a tenant preparing to enter a commercial property contract should have a lawyer or commercial real estate tenant broker involved in the leasing process to advocate on their behalf.
This person will be able to contribute their knowledge and expertise of leases and real estate to ensure that the lessee does not get taken advantage of and to ensure that the tenant fully understands what will be required of them under the agreement. They will guide you through the leasing process, from submitting a letter of intent to negotiating the lease and beyond.
Renewing a commercial lease
If you like your office space and want to stay past the end of your lease term, you’ll need to consider a lease renewal or lease extension. You can opt to request for the terms of your existing lease to continue, or you can work with your broker to renegotiate the lease.
Lease long and prosper
Now that you have a detailed sense of what a commercial lease is, you’re better equipped to approach this type of agreement when putting in an offer on an office. Be certain that you don’t sign any rental agreement that you haven’t read carefully, and don’t be shy about seeking assistance from a real estate professional.