What to Know About a Commercial Lease

If you’re thinking about getting into a commercial lease, there are some important things to know. 

You want to get the best terms on your lease, and you want to ensure that you get any concessions from the landlord that you need to do business. 

For example, maybe you want to make sure you have commercial AC and heat window units in the property before you sign anything. If so, how can you negotiate this so that you aren’t responsible?

The following are some of the important things to know about a commercial lease and the negotiation process.

How a Commercial Lease Differs from a Residential Lease

When you sign a commercial lease, you’re likely going to have fewer protections than you would when signing a residential lease. The reason for this is that the law views commercial leases as contracts entered into by two business people. The idea that underlies commercial leases is that you should be able to negotiate the terms you want on a commercial lease. 

You will have more negotiating power as such, relative to a residential lease. 

A commercial lease is legally binding, tough to break, and there aren’t standard forms. Since there isn’t a standardized form, you’ll need to go over every detail before you sign. 

A commercial lease will usually include the following components:

• The type of property and the address
• The term of the tenancy
• There may be stipulations as to whether the tenancy is renewed periodically or is for a fixed term 
• The rent payments and when rent is to be paid
• The type of business that can be done in the property
• Guidelines for lease renewal
• Signing incentives and landlord improvements
• Insurance provisions

Is the Lease Right for Your Business?

Before you sign a commercial lease, is it right for your business and the needs of your business?

You have to think not just about whether or not you can afford the rent, but the length of the lease is important. You don’t want to be locked into a long five- or ten-year lease if you can avoid it, because the needs of your business can change over the years. 

If you can negotiate a shorter-term lease with renewals, that’s usually best in a business situation. 

You’ll also need to think logistically about how your business will operate in the space as-is and whether or not you will need to make changes. 

Common Commercial Lease Structures

There are certain ways commercial leases may be structured and terms to describe these. Some include:

• Single Net Lease, Net Lease: In this situation, a tenant is responsible for property tax and utilities, while the landlord holds the responsibility for maintenance costs as well as repairs and insurance. 
• Net-Net: Also known as double-net leases, if you sign one of these agreements, you as the tenant are responsible for property taxes, utilities, and insurance premiums. The landlord is responsible for repairs and maintenance. 
• Triple-Net:  With this type of lease, as a tenant, you are responsible for all costs of the building but in most cases, the landlord is responsible for making any structural repairs. 
• Full Service or Modified Gross Lease: In this scenario, the landlord and the tenant split structural repairs and operating expenses, including things like property taxes and common area maintenance. 

Read the Entire Lease

Before you sign a commercial lease, you should absolutely read every word of it. If you don’t, you could find yourself in a difficult situation. There may be errors as well as terms buried in a lease that aren’t favorable to you. 

You need to know what your obligations are, what your landlord’s obligations are, and what you would need to do to terminate a lease. 

CAM Terms

A big issue with commercial leases that you may not be familiar with if you haven’t signed one before is CAM. CAM stands for common area maintenance. You will probably have a percentage of the common area fees you’re responsible for, based on how much of the building you rent. 

This can be one of the most confusing aspects of a commercial lease for people who haven’t signed one before, and CAM can be expensive. 

CAM terms are one of the main areas you should negotiate. Finally, another term you may see is capital expenditures. Capital expenditures include something touched on above—things like HVAC repairs or the addition of window units. It can also include the roof, the foundation, and other major replacements and repairs. You should make sure that as a tenant you don’t sign a lease that puts this burden on you.