What is a commercial lease?

A commercial lease is an arrangement between someone who owns a property and someone who wants to use the property in their business. These leases are contracts that are created to fit the needs of the particular parties involved.

What is the difference between a commercial lease agreement and a residential lease agreement?

The most significant difference between a commercial and residential lease is obvious: commercial leases are used for commercial properties while the primary purpose of a residential lease is to provide a property in which someone will live. Residential leases are often referred to as “rental agreements.” Typical residential leases are for: apartments houses townhouses condominiums Residential leases usually have no commercial purpose and most residential leases will run for a much shorter time period than a commercial lease—usually one year or less. They are also generally paid on a monthly basis. Termination requires much less notice than a commercial lease as well. A commercial lease, on the other hand, is between a commercial tenant and a landlord. The purpose of the contract is to provide a property for the tenant from which to run a business. It involves the sale of goods or services or provides a place to manufacture a product. The rental space is not designed to provide a place to live, and it is often against local or state law (or the lease agreement) to reside in a commercial space. Residential renters have a lot more protections compared to commercial renters. Those who are renting an apartment often do not have the same type of experience or business knowledge that someone using a commercial lease would have. As a result, state law usually protects residential renters from certain abuses that their landlords may attempt. For example, residential landlords must keep their premises habitable, which includes providing things like heat and water. Commercial landlords have no such obligation unless it is explicitly spelled out in the lease agreement. Residential landlords are often in charge of things like keeping the premises pest free and providing necessary maintenance. Commercial tenants do not have the same benefits; they are often tasked with doing their own maintenance for the portion of the property that they are renting. Common area maintenance is usually the responsibility of the commercial landlord, however.

What are the basic requirements of a commercial lease agreement?

Commercial lease agreements must contain certain information to be legally compliant with state law. While states differ, most commercial leases contain the following information: The party names, addresses, and contact information The address of the rental property The rental term (length of the agreement) How to terminate or renew the agreement when it expires The duties of the landlord and tenant The permitted business activities of the tenant Rental payment details Terms of any deposit or fees Maintenance responsibilities Ownership of any improvements made to the unit Outside of meeting state requirements, the parties have a lot of flexibility in the terms and conditions they can include in their commercial lease agreement. LegalNature allows you to customize your agreement according to your needs by adding as many of your own terms as are needed. You can also make text edits to your document by downloading it in .docx format and opening it in Microsoft Word or Google Docs. Commercial lease amendments should also be in writing to avoid "he said, she said" disputes. In fact, many lease agreements will require that changes to the agreement be in writing to be enforceable.

What law governs a commercial lease?

A commercial lease is usually governed by the state and local laws that apply where the property sits, regardless of where each party’s headquarters or principal place of business is located. In some situations, federal law may apply, but those circumstances are rare and often address only a portion of the company.

What is a commercial lease assignment? Is it different from a commercial sublease?

Landlords can assign the rent that they receive from a commercial tenant to another person or entity. They usually do this to pay off an outstanding debt or other obligation. They can also use it as a way to fund other business ventures. If a landlord assigns its right to the rental payments, the tenant must pay its rent obligation to a different entity, but the responsibility to pay rent will generally stay the same. The assignee can often step into the shoes of the landlord and force a tenant out of a specific location if the tenant is not meeting their rental obligations. A commercial sublease, on the other hand, deals with the tenant’s right to allow someone else to lease the property from them. Subleases are generally only permitted if the commercial lease does not prohibit them. In many circumstances, the tenant must get permission from the landlord to engage in a commercial sublease agreement. Often, subleases may not be possible because of restrictions in the commercial lease, including specific limits that affect the type of business that can move into that particular location.

What are the tenant's responsibilities in a commercial lease?

The answer to this question will depend on what your commercial lease agreement says. As either a tenant or a landlord, you can negotiate virtually any term in the lease. That means that if you want to cut down on tenant responsibilities, you can do so, as long as the other party agrees. Some of the most common tenant responsibilities include the following: The obligation to pay rent Maintaining the rented space so that it is in good working order Using the property only as permitted in the lease agreement These basic obligations can be expanded significantly. For example, the landlord may want you to maintain the HVAC system for your unit. You may also contract with the landlord so that he or she provides “handyman” services on an as-needed basis. While a commercial tenant is usually responsible for general upkeep, it can contract that obligation away to the landlord or to someone else entirely. Generally, the landlord will be in charge of maintaining the common areas, including parking lots, hallways, and other gathering spaces, but not always. If there are no common spaces and you are renting the entire property, you are much more likely to be responsible for maintenance of the whole area. However, the landlord may still be obligated to maintain structural aspects of the property, such as the foundation or the roof. Carefully construct or read through the lease agreement so that you understand the responsibilities of each party.

Can a commercial tenant make changes to a property under a commercial lease?

In some situations, a tenant may be able to alter the fixtures or make improvements to the property to fit their business. These provisions should be directly addressed in the commercial lease agreement. There are generally three types of improvements that may be available under the contract: Fixtures – A fixture is a part of the property that is attached to the premises. Although you could move it, it would be difficult and may cause damage to the structure if it were removed. The most common examples of fixtures include things like toilets and sinks, but it can also include things like built-in refrigeration units, large ovens, and built-in shelving. Commercial leases often specifically address whether installation or improvements to fixtures are permitted. Chattels – Most tenants will be able to improve chattels in a rental space. These items are easily removed from the premises. Renters will sometimes take these items from location to location with them as well. Typical examples include curtains, desks, personal computers, and even large refrigeration units that are not built into a specific space. Permanent improvements – These improvements are often referred to as “leasehold improvements.” They cannot be removed from the property without destroying the value of the improvement. They usually include things like adding walls or flooring. Some commercial leases encourage leasehold improvements, while others entirely prohibit them. As a rule, the landlord will own the improvement to the property once it is made, which sometimes discourages renters from making such improvements, even if they are permitted. Remember, commercial leases are extremely flexible. The parties can negotiate improvements to fit their specific needs. If the commercial lease does not address improvements specifically, it could become a problem if the renter makes a significant change to the property that the landlord did not want or anticipate.

How can a commercial lease be terminated?

Commercial leases often have long terms, some up to several decades. Terminating a contract can be somewhat tricky, but it depends on the language of the lease. In most leases, there is a notice provision that you must follow if either party does not want to renew the lease. Otherwise, the contract will often automatically renew. If you attempt to terminate the lease early, you may have to pay a penalty that includes the full value of the lease for the entire term of the contract. While these provisions are great for landlords, they can be very costly for renters. Renters should think long and hard about using these types of terms in their lease. Even if the lease does not include favorable termination terms, you may be able to work out something with the tenant or landlord to get out of the lease early. Sometimes simply approaching the other party to let them know about your situation can help a great deal.

What are various types of rent payments available in a commercial lease?

Most renters assume that their rent will be a periodic payment. It can be monthly, quarterly, or annually. However, some businesses will choose to use a different type of rental agreement depending on the type of property. One type of rent agreement is directly tied to the revenue that the business earns at that particular location. This type of contract is particularly common in shopping malls or strip malls. Revenue-based rent is often called a “percentage lease.” It includes a base level of rent that will be due regardless of the income that you make at that location. Then there is an additional amount that varies depending on your revenue for a particular month, quarter, or year. For example, if you have an agreement that includes $1,000 in monthly rent and then 5% of your profits for that month, and you make $5,000 in profits that month, your total rent due for the month would be $1,250. As your earnings increase, so does the rent. That means it is in the landlord’s best interest to ensure that you have whatever you need to increase profits, including proper maintenance and upkeep. Another type of rental agreement is referred to as a “gross rent lease.” Under this agreement, the tenant pays a flat rate and the landlord pays other costs related to maintaining and operating the property. These expenses often include things like: insurance utilities taxes general upkeep and maintenance expenses Under other types of agreements, the tenant will typically be responsible for these costs.

Commercial Lease Agreement

A commercial lease agreement should provide the parties with clarity, predictability, and solid legal protection for each part of the rental process.

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When to use a commercial lease agreement

To establish a stable, long-term occupancy
To indicate any rules that will apply throughout the lease
To provide specific disclosures as required by law or regulation
To have a written agreement defining the lease's most important terms

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