Commercial Lease Agreement

A commercial lease agreement is a binding contract between a landlord and a tenant for the rental of a property specifically for business purposes like office, retail, commercial or industrial space. This contract contains the terms and conditions of the lease including the rent, term, penalties and allowed uses of the property.

The types of properties that require a commercial lease agreement include the following:

• Retail stores and shops
• Restaurants
• Office spaces
• Industrial property, including factories, warehouses, and storage units

Commercial Lease Agreements by State

Are Written Commercial Lease Agreements Required?

In most states, commercial lease agreements are required to be in writing if they are for longer than 12 months. This is enforced on the state level, but most states have adopted a statute of frauds which requires that every contract that cannot be completed in under 12 months be written.

Commercial leases are commonly three or more years in length, so the statute of frauds prevents oral contracts in most cases.

How Does a Commercial Lease Differ From a Residential Lease?

Commercial leases vary from residential leases in several significant ways:

• Length of the Lease – Commercial leases generally range from three to five years in length.
• Determining Rent – Rent is usually determined in commercial spaces by determining a price per square foot. The typical rent number varies widely by property type and location.
• More Landlord Power –  Commercial landlords usually have more authority for actions such as constructive eviction and removing tenants through arbitration. Commercial landlords are also not required to make repairs and are not bound by rent control laws (unless these things are specifically spelled out in the lease).
• Fewer Regulations and Requirements – While residential leases are heavily governed by statute, commercial leases rely more on the wording of the contract. Most things are negotiable, and both parties need to beware of vague wording or hidden meanings.

Commercial Lease Types

There are several types of commercial lease structures characterized by their method of payment—gross or net. Commercial lease agreements include:

Gross Lease

A gross lease covers rent, operating costs, taxes, insurances, and utilities, through a single payment. This type of lease is most tenant friendly, as there are no hidden costs, and the tenant can forecast their monthly and annual lease payments.

Modified Gross Lease

A modified gross lease requires the tenant to pay their base rent plus an additional portion of the operating costs. This type of lease is often used in buildings shared by multiple tenants that include common areas.

Furthermore, a modified gross lease will most likely have an expense stop. This means that the landlord will cover an expense until a certain amount is reached and then it will be the tenant’s responsibility to pay for the remainder of that expense.

Net Lease

A net lease requires the tenant to pay a base rent and the operating costs. Operating costs can include insurance, utilities, maintenance, taxes, and more. There are four types of Net Leases:

• Single Net Lease – The tenant pays for the base rent plus property taxes. The landlord is responsible for operating expenses, repairs, and insurance premiums. This is one of the least common commercial lease structures used.
• Double Net Lease – The tenant is responsible for the base rent, insurance premiums, and property taxes. The landlord typically pays for operating expenses, maintenance and structural repairs. This type of lease structure is often used for multi-tenant buildings.
• Triple Net Lease – A tenant pays for the base rent, taxes, insurance premiums, utilities, and maintenance. Triple net leases are the most landlord-friendly and are generally used with large, single business spaces.
• Absolute Lease – The tenant pays for the base rent, major repairs, and expenses (i.e., insurance premiums, taxes, utilities, and more).

Percentage Lease

A percentage lease is when a lessee pays a base rent plus a percentage of the business’s gross income. The landlord usually pays for property taxes, insurance premiums, and maintenance. The percentage is negotiated between landlord and tenant and is clearly stated in the lease agreement. Restaurants and retail stores commonly use a percentage lease and pay around 5%-10%.

Common Commercial Lease Clauses and Disclosures

There are many lease clauses and disclosures that are either legally required to be included in a commercial lease, or are commonly used in many leases.

• Americans With Disabilities Act – This act requires that businesses which are open to the public be accessible by people with disabilities. The responsibility generally falls on the tenant to comply, however some tenants can negotiate with landlords to provide more expensive features, such as an elevator. [1]
• Competitor or Exclusivity Clause – A tenant can request they be the only type of that retailer in the building. For example, the owner of a pizza restaurant can request the landlord specify in the lease that no other tenants will be pizza restaurant companies.
• Insurance Clause – Specifies what types of insurance the landlord and tenant must carry.
• Option to Purchase – This allows the tenant to buy the property after a predetermined amount of time and possibly a predetermined price. Or rather than a predetermined price, the tenant can be allowed to indicate their intent to purchase, which would open up a formal negotiation.
• Renovations and Repair Clause – This specifies what improvements a tenant is allowed to make, as well as who is responsible for fixing broken items in the unit.
• Termination Clause – This allows for either tenants or the landlord to get out of the lease at usually a very high cost. A tenant may choose to exercise this clause if they’re going out of business. A landlord may terminate if they get a good offer to sell the building and it’s worth paying the fee.
• Rent Escalation – This clause determines rent increases for the unit. These are often a certain percentage per year, or can be based upon an external factor, such as the CPI.
• Lease Renewal – Will the lease auto-renew, for how long, and at what price?
• Use Clause – Defines the allowed uses of the unit.
• Parking – Determines where the tenants, employees, and customers can park (if applicable).
• Personal Guarantee – If a business cannot pay the lease or other expenses, this clause would require the tenant (usually the CEO) to personally be liable.

What to Include in a Commercial Lease

These items are generally included in commercial leases in addition to common clauses and disclosures:

• Landlord, Tenant, and Property Manager Information – Their names, business addresses, phone numbers, and other information. For the tenant, this should include information about a legally formed business. Not-yet-existing business entities cannot legally be party to a lease.
• Property Details – Gives the full address, suite number, and square footage.
• Lease terms – Sets the start and end date, as well as an option to auto-renew (if applicable).
• Subletting – If there is no mention of subleasing, the tenant can usually do so. Tenants are usually responsible for sublessees that do not abide by the terms of the lease (e.g., covering rent payments for a non-paying sublessee).
• Arbitration – This requires both parties to resolve disputes by adhering to the decision of an arbitrator.
• Rent – How is rent calculated, when is it due, what happens if rent is past due, and what are the penalties for late rent.
• Eviction Process – What qualifies as reasons for evictions and what the process and timeframe would look like.
• Utilities Insurance, and Other Expenses – This will vary based on the type of lease.
• Security Deposit – How much is required, what happens to the held money, and how and when it will be returned.
• Jurisdiction – Defines which state’s laws will apply during a dispute.
• Security – Who’s in charge of maintaining security, such as cameras, alarm systems, and more.
• Right of Entry – Determines when a landlord can enter the premises.
• Holdover Tenancy – If the tenant stays past the contract’s expiration, the lease should define monetary penalties and what recourse the owner has in getting the tenant out.
• Signs and Advertising – Defines what rights the tenant has to adjust signs, display any advertising on the building, and if there is a marquee that can be updated.
• Solvency – States the tenant’s rights if the property is foreclosed upon.
• Zoning – Defines the zoning laws or other restrictions that apply to the premises.

Do Commercial Leases Need to Be Notarized?

Most states do not require that commercial leases be notarized, but laws can vary by state. For example, Ohio requires that leases longer than three years be notarized. [2]

However, many landlords and tenants decide to have leases notarized regardless of their state’s law. This helps to confirm the validity of the document should disputes arise later.