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