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 will contain the terms and conditions of the lease including the rent, term, penalties and allowed uses of the property.
State-Specific Commercial Lease Agreement Templates
About Commercial Lease Agreements
A commercial lease agreement is a written document between a landlord and tenant for the purpose of renting an office, retail, or industrial space—the landlord allows the tenant to use the property for commercial (or business) purposes in return for rent. Businesses rent commercial spaces from shopping centers, office buildings, and warehouses to save money—since it is often much more expensive to buy and manage a commercial property. A commercial lease agreement allows the landlord and tenant to negotiate terms and responsibilities while providing the business (or tenant) a way out in case they need to move or close their business.
Since there are no unique standards for writing a commercial lease, the terms of the lease will be unique to the landlord and tenant (while containing similar characteristics to other commercial leases). This makes writing a commercial lease agreement challenging—driving tenants and landlords to be diligent when negotiating terms. Once signed, the agreement will legally bind the relationship between the two parties.
“Do I Need a Commercial Lease Agreement?”
Renting a commercial property without written rules and expectations of the tenancy is an invitation for trouble. The landlord-tenant relationship can be complicated—with so many federal, state and local laws that govern commercial property rentals makes it that much more complex. By writing a lease agreement, you record and legally bind the details of your agreement—as a result (if written) it can reduce unintentional contract violations by either the landlord or the tenant.
Some landlords don’t use written leases—they prefer a verbal agreement. While verbal agreements can be legally binding, they are often difficult to prove to a judge. By signing a written commercial lease, your arrangement becomes legally binding and you have proof of your agreement. Here are a few more reasons a written lease is important:
- It helps you avoid disputes. With no clear written agreement, every conflict has the potential to escalate into a legal battle.
- Ensures your rights. Without a written agreement, landlords and tenants risk not being able to collect for damages by the other party.
Types of Commercial Properties
Any property used in commerce is considered a commercial property. Zoning and licensing authorities may divide commercial properties based on the business conducted on the property, however, most consider these subsets of commercial real estate. Commercial properties are separated into four classes based on their purpose: office, industrial, multifamily, and retail.
Office. Office buildings are classified as low, mid, or high-rise properties and are based on the number of stories the building has. These properties are further (loosely) grouped into one of three classes Class A, Class B, and Class C. These classifications can be entirely relative to the context of the property’s location, age, and surrounding market.
- Class A buildings represent the best of the best in terms of aesthetics, age, quality of infrastructure, and location.
- Class B buildings represent the midline—they have high-quality construction but are older and in less desirable areas than Class A. Investors often purchase these buildings for restoration.
- Class C buildings represent the oldest of these properties. These buildings are typically over 20 years of age and can be both dilapidated and in an unfavorable location.
Industrial. Industrial properties include warehouses and factories—and are often large spaces outside of town. Superior industrial properties are close to major transportation routes and are up to code for their unique manufacturing purposes. These properties can vary in size based on their specific use-cases. The most common types of industrial properties include:
- Heavy manufacturing properties are heavily customized with end-user machinery and normally require substantial renovations to rent to a different tenant.
- Flex warehouse space includes a mix of both industrial and office space. Flex warehouse space can be converted quickly to and from an office, industrial or mixed-use space.
- Bulk warehouse properties are very large, normally between 50,000-1,000,000 square feet and are used for the regional distribution of products. Bulk warehouses are commonly found near major transportation routes.
- Light assembly structures can easily be reconfigured into a variety of spaces. These structures are often used for storage, product assembly, and office space.
Multifamily. Multifamily properties can serve as a residence, however, the general purpose for the property type is for investment. The multifamily classes include anything from a duplex up to a high-rise apartment building. Smaller properties are commonly purchased by new investors looking to make a profit on the property (by renting it out). Larger properties such as mid-and high-rise apartments and found in larger markets and are managed by sizable groups.
Retail. Retail properties include shopping centers, restaurants, and individually owned shops. The larger the property, the more likely there will be multiple tenants renting space for their business. The most common types of retail properties include:
- Shopping center. These properties contain a mix of small restaurants, stores, dry cleaners, or nail salons. They may or may not contain an anchor tenant—a larger retail tenant that draws customers to the property. Wal-Mart is an example of an anchor tenant.
- Community retail center. Community retail centers are larger than shopping centers—they range from 150,000-350,000 square feet. They contain multiple anchor tenants, a few restaurants besides a grocery and/or drug store.
- Power center. Power centers contain a few major retailers (such as Wal-Mart, Staples) besides multiple restaurants, grocery stores, and drugstores. Each major retailer occupies a large amount of space—ranging from 30,000-200,000 square feet.
- Mixed-use. These properties are typically retail and restaurant properties with offices or residences sitting above them.
Additional Types of Commercial Rental Properties
- Booth Rental
- Garage Rental
- Facility Event Space Rental
- Commercial Sublease
Commercial Lease Terms
A commercial lease is a written plan of the occupancy—it defines the rights and responsibilities of both the landlord and tenant. It also serves as a guideline for when rent is due, the duration of the occupancy, and specific provisions that are required by law or agreed to by both parties.
Commercial leases are more flexible or negotiable based on the needs of different business owners (tenants) and the various commercial properties available. Terms and conditions should be negotiated (if negotiable) by both parties. If you are concerned with getting a good value then negotiating terms can help you find out what options are available to you.
Commercial lease agreements contain several more provisions than their residential counterparts—mainly to protect both landlord and tenant. Terms of a commercial lease agreement can differ depending on the property, location, and property owner. Standard commercial leases contain the following terms:
- Americans with Disability Act (ADA) compliance. The Americans with Disabilities Act (ADA) is a federal law that requires commercial tenants (and landlords) to adhere to all handicap access rules. Act 42 U.S. Code § 12183 states that if the lessee (tenant) is using the property as a public accommodation (e.g. restaurants, shopping centers, office buildings) or there are over 15 employees, the property must provide accommodations and access to persons with disabilities that are equal or similar to those available to the public. Owners, operators, lessors (landlords), and lessees (tenants) of commercial properties are all responsible for ADA compliance. If the property does not comply, any modifications or construction needed to achieve it will be the responsibility of the lessor (landlord).
- Deposits and fees. The amount of the security deposit and any other fees required to rent the property.
- Exclusive use. The landlord can decide if they will give the tenant exclusive use. This means the tenant’s business would be the only business on the landlord’s property allowed to conduct that specific business.
- Hazardous Waste. Requires the tenant to acknowledge that they will adhere to federal, state, or local laws in regards to the disposal of hazardous wastes. Act 42 U.S. Code § 6901 states that all federal, state, or local laws, ordinances, rules, decrees, orders, regulations, or court decisions relating to hazardous substances, hazardous materials, hazardous waste, toxic substances, environmental conditions on, under, or about the Premises, the Building, or the Property, or soil and groundwater conditions, including, but not limited to, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), the Resource Conservation and Recovery Act (RCRA), the Hazardous Materials Transportation Act, any other law or legal requirement concerning hazardous or toxic substances, and any amendments to the foregoing.
- Improvements. Tenants will need to make renovations or improvements to the commercial property to conduct their day-to-day business. Both parties will need to negotiate who is responsible for the cost of these renovations or improvements. Sometimes, the tenant may require the landlord to cover the cost. Regardless of who pays for them, the landlord will need to approve any renovation or improvement, and the process will need to be documented within the lease agreement.
- Landlord. The owner of the property or lessor.
- Maintenance. Identifies who maintains the property, besides who will pay for any maintenance needed.
- Operating costs and utilities. The division of operating costs and utilities each party will pay. Tenants might be asked to pay a percentage of or a fixed-rate towards the property’s operating costs and utilities. The landlord will need to determine how and when the payments should be paid (either directly to the landlord or the utility companies).
- Property. Commercial leases typically classify the property:
- Demised Premise. The actual space being rented by the tenant (for instance, an office within an office park). The lease should include a property map with details about the space they are renting; examples include square footage, parking, cleaning, security, landscaping, and heating and air conditioning.
- Real Property. The entire property owned by the landlord (for instance, an entire office park).
- Property description. A precise description of the property under lease. This would include whether it includes bathrooms, common areas, a kitchen area, a parking facility, a storage area, furnishings, and other included amenities.
- Property use. How the tenant plans to use the property (the type of business).
- Rent. The amount of money paid by the tenant. There’s a lot more to this than the monthly rent amount. Commercial lease agreements typically specify the amount of rent due, when and where it’s due, acceptable forms of payment and any additional charges or late fees that apply.
- Rent increases (escalation). Long-term commercial leases typically require rent increases over a specified period—these can be negotiated and included in the agreement.
- Sublease. Whether the landlord allows the tenant to assign the lease or sublet the space to another tenant.
- Taxes. The division of property taxes each party will pay. Landlords often require commercial tenants to pay a portion of the property tax—the landlord could ask the tenant to pay a percentage or a fixed-rate towards them.
- Tenant. The business owner who wants to use the property for commercial use.
- Term of the tenancy. The term of the tenancy is the time the property will be rented. A lease should include a start and end date. Depending on the business conducted on the property, the term can vary significantly—from weekly to yearly. However, commercial leases typically last between three to five years.
- Warranty. Statement by the landlord that the premises are in compliance with federal, state, and local laws.
- Zoning. Defines the zoning laws or other restrictions that apply to the premises.
The length of a commercial lease will vary based on the number of terms it contains—don’t worry if yours has many pages. These documents should be written (preferably typed) and straightforward. After adding all the essential information to the commercial lease agreement, tailor it further to reflect the individual aspects of your business or property. Here are some additional terms that can be included in your agreement:
- Destruction or condemnation. It requires a landlord to rebuild the property if destroyed.
- Enforcement. Determines how the lease agreement will be enforced—besides which party is responsible for attorney fees. Many commercial agreements also include a clause requiring the parties to resolve their dispute through mediation first.
- Expansion. Use if the tenant would like to add nearby space or move into a larger vacant space on the premises.
- First right of refusal. If the property is for sale and goes under contract with a buyer, this allows the tenant to purchase the property for the same price. The landlord will usually give the tenant 30 or 60 days to secure financing if they purchase the property.
- Grace period. Agree to a period for either party to comply with the terms of the lease.
- Insurance and liability. Used to specify which party is responsible for liability and casualty insurance (and the coverage required).
- Option to purchase. Use if the tenant would like the option to purchase the property for a specified price during their lease.
- Option to renew. Use if the tenant would like to have the option to stay in the property for a long time, then they may request an option to renew the lease. This allows them the right to extend the lease for a specified rental price if they want.
- Right of entry. This allows the landlord to enter the premises on an as-needed basis.
- Solvency. Describes the tenant’s rights if there is a foreclosure on the leased property.
Next up we will go over the different commercial leases, however, regardless of the commercial lease used (gross or net as described below), the commercial lease terms are considerably more important.
Types of Commercial Leases
There are three types of commercial leases available for business tenancies. The characteristics that differentiate (and categorize) these leases are based on their method of payment, gross or net. The three types of commercial leases available are:
Gross Lease (Full-service Lease). In a gross lease, the tenant pays a higher price point for an all-inclusive rent. Nearly all the property’s operating costs are covered by the landlord, such as insurance, maintenance, and property taxes. This lease allows the tenant to focus on growing their business, while the landlord is responsible for the property’s operating costs.
Modified Gross Lease. A changed gross lease balances the property’s operating responsibilities between both parties. In this agreement, the tenant will pay rent besides a variety of costs directly related to their particular space. These costs may include maintenance, repairs, or utilities. The landlord is responsible for the common area which may include its maintenance, landscaping, and lot care. Office spaces frequently operate under this lease since they are fairer for the tenants.
Net Lease. In a net lease, the tenant pays a lower price point for rent while assuming responsibility for some or all of the property’s operating expenses. These responsibilities might include maintenance, insurance, utilities, and taxes. Net leases are available in a single (N), double (NN), or triple (NNN) nets. These nets (Ns) are referred to as property tax, property insurance, and property maintenance. Operating expenses will vary based on the unique lease; However, the specific operating expense will change based on the net lease contracted.
- Single Net Lease (N). In a single net lease, the tenant pays rent plus a share of the building’s property tax. Here, the tenant pays a portion of the building’s property tax based on the proportion of square footage being leased. The landlord typically covers all other building expenses while the tenant pays for utilities and janitorial services.
- Double Net Lease (NN). With a double net lease, the tenant pays their base rent, property insurance, and a proportional share of the building’s property tax. The landlord covers structural repairs and maintenance for common areas building lobbies and bathrooms. The tenant is also usually responsible for covering utility and extra janitorial expenses.
- Triple Net Lease (NNN). Besides the rent, with a triple net lease, the tenant will also pay their portion of the property taxes, property insurance, and property maintenance. This typically includes utilities, maintenance, repairs, and operating costs. In this arrangement, the landlord’s obligation is to provide space and charge the tenant to conduct business out of that space. It leaves every other cost to the tenant to sort out. This means that while the base rent is lower for the tenant, the tenant is also responsible for the monthly costs associated with maintaining the property. These expenses are added to the base rent monthly. Triple net leases are the most landlord-friendly.
How to Rent Your Commercial Property: Landlords
Landlords will need to set both clear and realistic expectations for tenants when renting out their commercial property. The best leases are built for both parties (landlord and tenant) allowing them to profit from their business relationship. Here are a few steps to help you get started:
- Determine Available Space. Measure and calculate the square footage. You can do this by multiplying the length and width of the interior usable space.
- Set Price Per Square Foot ($/SF). Commercial rent is marketed as a price per square foot ($/SF). Check your local market to find out how much other landlords are charging per square foot—then price your property accordingly.
- Select Lease Type. Will the rental include all or a portion of the property taxes, property insurance, and property maintenance? Review the commercial leases (above) to help you decide.
- List the Property. You will want to market your property to all of those prospective tenants. You can market the property on your own or pay a real estate agent to market it on your behalf.
Note: Commercial real estate leases are generally facilitated through a broker. Listing agents are hired by a landlord to list their commercial property. Listing agents earn a commission that’s paid by the landlord, typically between 4%–6% of the total lease. This means that a listing agent always has a duty to act in the best interest of the landlord.
- Negotiate Terms. Since a commercial lease is a legal contract between you and a tenant, you will want to negotiate terms with both party’s interests in mind.
- Conduct a Background and Credit Check. Inspect your prospective tenant’s financial status by completing a background check on their individual and business (if applicable) credit.
- Decide on a Tenant. Once you have decided on a tenant, inform the tenants you reject with a tenant rejection letter (are we going to write one to link?).
- Collect the Security Deposit. Collect your security deposit. Landlords typically charge an amount of two to three months’ rent. This will secure against potential tenant damages during the lease.
- Write the Agreement. Involve a real estate attorney that specializes in property leases to help you or write the lease on your own—keep in mind, your commercial lease can ultimately improve your business or hold it back. Once written, both parties should sign the document in the presence of a notary public.
After you have collected the security deposit, and the tenant has signed the lease, they can take occupancy. Both parties are now accountable for their duties as described in the lease.
How to Rent a Commercial Property: Tenants
1. Determine Your Needs. Since commercial real estate is available for such a wide range of businesses, you will want to determine which type of commercial space best suits your needs. The following parameters will help narrow your search to spaces that fit your unique requirements:
- Customer/employee pool. Knowing your ideal customer or employee is important when selecting a commercial property.
For retail or restaurant space, who do you want to attract to your location? For example, if you sell high-end designer clothing, you will want to locate your business in a wealthy area. For office space, this is probably less important—instead, select a location convenient for employees.
- Property type and zoning. Commercial properties are zoned for specific uses—the zoning dictates the business that can operate out of that space. Make sure you understand your local zoning laws and the zoning your business needs. For retail or restaurant space, you cannot lease a property zoned for office space. For office space, you cannot lease property zoned for retail or a restaurant. Check with your local chamber of commerce or search online for zoning regulations using your zip code.
- Size. To calculate the size of the space needed, determine the number of customers or the size of your workforce to determine the square footage. For retail or restaurant space, figure out how many customers you expect to have on average and multiply that by 15 square feet. For office space, forecast the desired size of your workforce and multiply it by 100–150.
- Budget. Determine your maximum monthly budget to help limit your searches to spaces you can afford. The maximum budget will largely depend on your business’s size and performance. Here’s how to determine your maximum budget: (1) Determine the average price per square foot for your area. (2) Multiply the price per square foot by the square footage you need. (3) Divide the number by 12 to find your expected monthly lease payment. (4) Add your expected utilities and common area maintenance fees (utilities typically run ~$2 per square foot yearly and common area maintenance fees cost between 15%–35% of your yearly lease payment). (5) Include expenses for any expected renovations and annual rent increases. Overall, your maximum budget should not exceed 8% of your expected annual gross income.
- Accessibility. Accessibility plays an important role when selecting a commercial property. For example, does the property have adequate parking, a high amount of foot traffic, and vehicle traffic?
2. Find a Commercial Broker. Most commercial real estate leases are facilitated by brokers. Tenant brokers represent the business and their interests. Keep in mind, tenant brokers typically earn a percentage of the overall commission (paid by the landlord) and do not always act in the tenant’s best interest. You are not required to use a broker; however, they can help with finding available real estate, market pricing and comparison data, knowledge of market conditions and financing options.
3. Understand the Types of Commercial Leases. As discussed earlier, there are three types of commercial leases available. Identify which type of lease best suits your business needs.
- A full-service lease is the best type of lease for the tenant. There are no hidden costs, and tenants can forecast their monthly and annual lease payments.
- Triple net leases are the most landlord-friendly.
- A modified gross lease is a compromise of the full-service lease and the net lease.
4. Look at Properties. You (and your broker) should view multiple spaces to get a better idea of local market pricing—this will help you during the negotiation process. Make sure that the property is around your ideal customer or employee pool. Also, find a space that has adequate foot traffic and vehicle traffic and adequate parking for customers or employees.
Tip: Check out the property’s range of amenities and services. These may include loading docks, dining, communal rooms, free Wi-Fi, outdoor space, and security.
5. Conduct Technical Property Reviews. These walkthroughs, coined technical property reviews, will be conducted by your broker (or you) and the landlord’s broker. You’ll want to walk through with a licensed contractor since commercial spaces typically require renovations or improvements.
6. Research the Landlord. It’s standard for landlords to screen potential tenants—but what about your landlord’s references? Before signing a commercial lease, you might conduct some research of your own on your potential landlord.
7. Negotiate Terms.The deciding factor between your options will often be the lease terms. Once you’ve considered your property options and their associated leases, it’s time to choose your space and negotiate the lease. When formally entering a commercial lease negotiation process, you’ll want to start by requesting the terms in writing. This request can come from you or your broker and is supplied by the landlord’s broker.
Keep in mind, identifying, negotiating, and signing a commercial lease can be a long process.