Understanding Commercial Property Lease Agreements

Published: 11-17-23    Category: Leasing/Renting

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

A pair of glasses on top of a contract.

Many organizations eventually face the question of whether to buy or lease commercial property. While leasing is generally the less expensive route, you'll often sacrifice more facility control as a tenant than you would as a property owner.

Here, we'll cover what business owners should know before leasing commercial property for rent. We'll discuss key lease terms & clauses, negotiation tips, and the leasing process. We'll also cover commercial tenants' rights, obligations, and responsibilities.

Let's get started.

Key Terms & Clauses in Commercial Lease Agreements

Getting the best deal on commercial rental property is all about using the right language in the agreement.

Whether you're trying to rent retail space or lease an office building, below are some key commercial lease terms and clauses.

#1 – Rent Structure/Payment Terms

Rent structure and payment terms of a commercial lease determine the tenant's payment obligations. The two most common types of lease structures are gross and net leases.

With a gross lease, the tenant pays a flat monthly rent that covers all rental expenses. With a net lease, the tenant pays a base rent and also covers some or all of property taxes, insurance, and building maintenance.

Net leases are generally the most common option as they usually feature lower base rents since the tenant is also financially contributing to other property expenses.

Gross leases usually have higher rental rates, but the fixed monthly rental cost makes it easier for tenants to budget for their space.

#2 – Lease Duration & Renewal

The typical commercial real estate lease is a “5-and-5,” which refers to a five-year lease duration with an option to renew for an additional five years at the end. However, commercial lease durations can usually vary between one and ten years.

#3 – Maintenance Responsibilities

Commercial leases also set repair and maintenance responsibilities. Generally speaking, commercial tenants will be responsible for repairs and maintenance, aside from basic structural concerns.

Maintenance responsibilities might also include any equipment or fixtures included with the lease. For example, an automotive garage tenant might be responsible for repairing lifters or hoists.

#4 – Insurance & Liability Requirements

The vast majority of commercial leases require tenants to carry appropriate liability insurance. Liability insurance requirements protect the landlord from litigation if someone is hurt on the property.

#5 – Subleasing & Assignment Clauses

A commercial lease should also have a clause defining how the renter subleases extra space to a subtenant. An assignment clause determines if and when the tenant can transfer lease obligations to another party.

Negotiating Favorable Lease Terms

The trick to getting a good deal on commercial real estate for rent is bringing the right information to the table. The more you learn about a property and the surrounding market, the better equipped you'll be to bargain.

These rental tips can help you get a better deal.

  • Look up average nearby rents for similar properties. For example, say you're looking at leasing a specific retail spot. Research leasing rates of similar properties in the same market to better set your initial offer.
  • If you're unsure about any lease terminology or clauses, consider hiring a real estate attorney to look over the agreement.
  • Much of the negotiating should involve ironing out key lease terms and clauses.
  • Be sure you include a lease renegotiation clause determining when the involved parties can revisit the lease agreement.
  • Landlords might offer lease concessions to entice tenants to sign. Consider asking landlords to include some common lease concessions, such as rent abatement or a tenant improvement allowance.
  • Step into the landlord's shoes and try to reason from their perspective. A bit of empathy can make negotiations smoother and more friendly.

A commercial real estate broker can not only provide general commercial leasing advice but can also gather appropriate business documentation and take the lead in negotiations.

Tenant Rights & Protections

Commercial tenants have noticeably fewer rights and protections than residential tenants. Landlords can usually raise commercial rents whenever and by as much as they want, and commercial tenants have fewer protections against evictions. However, landlords must abide by federal regulations, such as non-discrimination laws.

A commercial lease should also have dispute resolution clauses that define what steps landlords and tenants can take if the other party breaches lease responsibilities.

Lease Agreement Review & Signing Process

A lease for commercial real estate for rent might go through several iterations before it is finalized. The lease review process starts when one party submits a tentative lease agreement to the other. The other party can then review the lease to clarify ambiguous passages or revise any problematic sections.

This back-and-forth of revisions will continue until both parties need no further changes or clarifications. The tenant can then sign the lease agreement and start occupying the premises.

Tenant Obligations & Responsibilities

A tenant's exact responsibilities will differ depending on the specifics of the commercial lease. However, there are a couple of key tenant obligations that most commercial leases will cover.

  • Rental Payments. Tenants are responsible for paying the agreed-upon rental amount on the agreed-upon dates. Leases often define late rent penalties and may offer a cure period for late rent.
  • Maintain Premises. Tenants are responsible for using the property according to lease requirements and maintaining the premises, including building interiors and exteriors.
  • Code Compliance. Tenants must also comply with any relevant codes, regulations, or ordinances governing commercial property use. These codes ensure the safety of the property.

Tenants might have other obligations depending on the specifics of the lease. Neglecting tenant obligations can risk penalties, so business owners must understand their responsibilities.

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