What is a Commercial Lease?
A commercial lease is a written agreement between a landlord and a business tenant. This legally binding contract allows you, as the tenant, to use the commercial premises for your business activity for a specified period of time by promising to pay an agreed-upon rate to the landlord.
Signing a commercial lease should take careful consideration. The points below will help you understand what to consider when looking for a commercial space. Seek advice and guidance from an accountant, commercial real estate agent and lawyer.
Commercial leases can run month-to-month or anywhere from one to ten years. The term is usually negotiable and renewable. Ensure you confirm your move-in date and your renewal time to avoid any unexpected costs or liabilities. Your lease should clearly illustrate what will happen if the space is not ready by the move-in date and what adjustments in rent will be made.
Commercial rents are usually based on the size of the space or the square footage. Your landlord may add operating costs to this base rent.
Various types of commercial leases involve different rent calculations:
- Percentage rent lease: pay a base rent plus a percentage based on your sales.
- Gross rent lease: pay a flat rate equal to base rent plus other specific expenses. The landlord pays the other operating costs.
- Net lease: pay some of the taxes plus the base rent.
- Net-net lease: pay base rent, taxes and insurance costs to the landlord.
- Triple net lease (net-net-net): pay base rent, taxes, and operating and maintenance costs.
Space Services and Features
To keep your employees and visitors comfortable, safe and healthy, find out whether the following services are included. Are the expenses of operating and maintaining these services and features the responsibility of you or your landlord?
- Parking spaces, public transit access, or safe walking/cycling route
- Heating, ventilation and air conditioning
- Snow removal/grass cutting/landscaping
- Sturdy stairwells
- Standards for indoor air quality
- Smoking restrictions near doors, building air intakes and windows
- Building certifications such as LEED, BOMA Best and WELL
Leasehold Improvements and Repairs
Leasehold improvements add value to the space. You may need to make changes or renovate your space in order to make it functional and aesthetically appropriate for your business. Leasehold improvements are typically considered investments, so determine if you or your landlord owns these assets. Make sure you know what you can take and what you will have to leave behind.
Repairs are day-to-day and major maintenance tasks that will upkeep the current state and value of the space and benefit future tenants. Determine who is responsible for not only fixing the repairs, but also paying.
Other Items to Consider
The amount of rent you pay is important, but other aspects of the lease are also significant.
- Options for first refusal if more space becomes available
- Other complimentary or competing businesses in the space
- Building rules
- Damage and destruction
- Escape clause (in the event you become unable to run the business)
- Content Insurance
- Utilities (water, electricity, sewer, gas, phone, internet)
- Type of business permitted to operate on the premises
- Subletting permissions
Because commercial leases can be complex, remember to consider the help of experienced professionals for guidance. Before signing any commercial lease, you may wish to seek legal advice. Be ready to negotiate. You are not expected to agree to all terms immediately, so be prepared to go back and forth.
Take the time to understand what is included in your lease. Go through it carefully on your own, then with your team of professionals (lawyer, accountant, lease consultant, property inspector, etc.). Always get decisions and changes in writing — a verbal agreement may not stand up in court. Most importantly, be prepared to walk away.