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What is a commercial lease agreement?
A commercial lease agreement is a legally binding contract between a landlord and a tenant for commercial property rental. Unlike residential leases, commercial leases are written explicitly for business use and involve less governmental oversight. These leases cover properties such as office spaces, industrial buildings, retail stores, warehouses, restaurants, and commercial kitchens.
Leasing a commercial property is a significant step for any business owner. Whether you're the landlord or the tenant, having a comprehensive commercial lease agreement helps to protect your interests and ensures that you remain compliant. It clearly defines the terms and conditions of the business lease itself, including the full lease duration, rent amount, maintenance responsibilities, and other critical details. A well-crafted commercial lease agreement that clarifies everything for both parties helps avoid misunderstandings and disputes, ensuring everyone is on the same page.
Types of commercial leases
Understanding the different types of commercial leases and which one you need for your property is essential to keeping your business compliant. Here's a breakdown of the most common types of commercial leases in terms of payments and structures:
Gross lease
A gross lease, also called a full-service lease, is when the tenant pays a fixed rent while the landlord covers most or all property expenses—such as taxes, insurance, and maintenance. This type of lease is straightforward and predictable, making it easier for tenants to budget their expenses since they don't have to deal with unplanned rent increases.
Net lease
A net lease requires the tenant to pay a fixed rent plus some or all other building expenses such as maintenance costs, insurance and others expenses that would be incurred by the landlord. There are variations of a net lease that vary in their lease terms:
Single net lease:
tenants pay rent and property taxes
Double net lease:
tenants pay rent, property tax, and insurance
Triple net lease:
tenants pay rent, property tax, insurance, and maintenance costs. Triple net leases are common in commercial real estate since it provides landlords with a stable income stream while passing on operating costs to the tenant
Modified gross lease
A modified gross lease is a combination of a gross and a net lease. In a modified lease agreement, the tenant and landlord share the property expenses, but the specific costs covered by each party vary. This type of lease offers more flexibility than other commercial lease agreements and can be tailored to meet the needs of both parties.
Percentage lease
Percentage lease agreements are usually seen in the retail space for businesses where the lease includes a base rent plus a percentage of the tenant's revenue. This lease aligns the landlord's income with the tenant's business success, providing more incentive for commercial landlords to support their tenants' business operations. The more revenue the tenant generates, the higher the landlord's total rent income. This can lead to the landlord actively promoting the tenant's business, maintaining the property to attract customers, and even assisting with marketing efforts to ensure the tenant's business grows and thrives.
A commercial lease agreement includes several essential elements that detail both the landlord and the tenant's obligations of the commercial proper:
Lease term
This defines the duration of the lease, including start and end dates and renewal options. Depending on the agreement between the parties, this lease term can range from a few months to several years.
Rent payments
This section details the amount of monthly rent due, payment schedule, and any escalation clauses for rent increases over time. Understanding these terms is crucial for budgeting and financial planning. Typically, an escalation clause may stipulate periodic increases in rent, such as an annual percentage increase. For the landlord, this helps ensure the rent remains aligned with current market rates and accounts for inflation, providing a predictable structure for both tenant and landlord over the lease term.
Property alterations
This clause specifies whether the new tenant can make alterations or improvements to the property and any required conditions or approvals. A property alteration clause helps ensure that both parties agree on the extent of permissible changes to the property.
Maintenance obligations
This section outlines each party's property maintenance responsibilities, and operating expenses, including routine maintenance and repairs. This clause helps prevent disputes over who is responsible for various maintenance tasks and other operating costs of business property.
This type of clause helps prevent the property owner or landlord from leasing nearby spaces to competitors, protecting the tenant's business interests. This clause is essential for retail tenants who rely on a unique market position.
Termination options
This section of a commercial lease agreement details the conditions under which either party can terminate the lease early, including any penalties or notice requirements. Knowing the termination options helps both parties plan for any potential changes.
ADA compliance
Whether you are the landlord or the leasee, it's important to ensure the property meets the requirements of the Americans with Disabilities Act, making it accessible to all. Compliance with ADA standards is essential for avoiding legal issues and ensuring the property is accessible to all customers and employees.
Commercial leases contain more than just the rent owed per commercial property. The landlord and the tenant must maintain the property as defined by the commercial lease agreement.
Tenant responsibilities
Tenants typically pay for certain utilities, maintain the interior of the property, and comply with safety regulations and any other tenant-specific obligations outlined in the lease. For example, tenants might be responsible for paying the security deposit, electricity, water, and gas bills, keeping the premises clean and in good repair, and adhering to fire safety and health codes.
Landlord responsibilities
Landlords are generally responsible for the overall structural maintenance of the property, ensuring that it meets health and safety standards, handling permits, insurance fees and taxes, and maintaining the property's exterior and common areas. For example, landlords might be responsible for repairing the roof and foundation, ensuring the building complies with fire safety regulations, obtaining necessary occupancy permits, building insurance, paying property taxes, and maintaining landscaping and parking lots.
While not legally required, working with a qualified lawyer when entering into a commercial lease agreement can help you avoid any issues down the line. Commercial leases are often complex and have detailed terms that can significantly impact your business's finances and operational costs. A commercial lease attorney has the expertise to understand and negotiate terms to protect your interests, potentially saving you from potential lawsuits or compliance issues. When you work with an attorney qualified in commercial lease agreements, they can help clarify your responsibilities, manage risks, and ensure compliance with applicable laws.
Benefits of using LegalZoom network attorneys
Working with one of our qualified network commercial lease attorneys provides several key benefits:
Expert negotiation:
Our network attorneys have the expertise to negotiate favorable lease terms just for you, ensuring your rights and interests are protected throughout the lease term.
Risk management:
Our network attorneys can help identify and mitigate potential risks associated with the commercial lease agreement, helping you avoid costly legal disputes and financial losses.
Compliance assurance:
We'll help ensure the lease complies with all applicable laws and regulations, reducing your risk of potential legal issues and penalties.
Custom solutions:
Working with one of our commercial lease attorneys can help tailor the lease agreement to meet your specific needs, providing customized solutions that address your unique business requirements while maintaining compliance with local regulations.
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