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.
Commercial Lease Agreements by State
Types of Commercial Lease Agreements
A commercial lease agreement allows the lessee to use the lessor’s property for commercial activity. The lease serves as a guideline for the date rent is due, the duration of the occupancy, and specific provisions that are required by law or agreed to by both parties. As there are no standard templates for writing a commercial lease, the terms of the lease will be unique.
There are several types of commercial lease structures available for business tenancies. The characteristics that differentiate (and categorize) these leases are based on their method of payment, gross or net. Commercial lease agreements include:
Gross Lease (Full-Service Lease)
A Gross Lease, or a Full-Service Lease is a commercial lease structure for lessees who want an all-inclusive lease agreement. The Gross Lease covers rent, operating costs, taxes, insurances, and utilities, through a single payment. The landlord pays for all expenses by charging the tenant a flat fee. 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 is a lease structure where the tenant pays their base rent plus an additional portion of the operating costs. In a Modified Gross Lease, the operating costs are both the landlord’s and tenant’s responsibilities, and these terms are negotiable and defined in the lease. A Modified Gross Lease is used when there is a common area shared between different businesses.
Furthermore, a Modified Gross Lease will most likely have an expense stop. This means that the landlord will cover the expense until a certain amount is reached and then it will be the tenant’s responsibility to pay for the remainder of that expense.
A Net Lease is where the tenant typically pays a base rent and the operating costs. Operating costs can include insurance, utilities, maintenance, taxes, etc. In a net lease, the tenant pays a lower price point for rent and shall assume responsibility for some or all of the property’s operating expenses. 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 but a landlord may prefer this to make sure that property taxes are paid on time.
- Double Net Lease. In this type of lease, a tenant is responsible for the base rent, insurance premiums and property taxes. The landlord typically pays for operating expenses, maintenance and structural repairs. Sometimes, a double net lease is called a “net-net” or “NN” lease. This type of lease structure is often used for multi-tenant buildings.
- Triple Net Lease. A tenant typically pays for the base rent, taxes, insurance premiums utilities and maintenance. A triple net lease is otherwise known as a “NNN” lease. 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 and are used with large, single business spaces.
- Absolute Lease. The tenant pays for the base rent, major repairs and expenses (i.e., insurance premiums, tax, utilities, etc.).
A percentage lease is when a lessee pays a base rent (minimum rent) plus a percentage of the business’s gross income for the total rent payment. The landlord usually pays for property taxes, insurance premiums and maintenance. The percentage is negotiated between lessee and lessor and is clearly stated in the lease agreement. Restaurants and retail stores commonly use a percentage lease and pay around 5%-10%.
Commercial Lease Agreements by Property Type
A commercial lease agreement should be executed when a business owner wants to use a property to conduct business. Cost is generally priced per square foot, and this can include rentable square footage (which includes common areas) or usable square footage (space exclusively used for the business). Zoning and licensing authorities may divide commercial properties based on the business conducted on the property. Check with your local chamber of commerce or search online for zoning regulations using your zip code.
Commercial properties can be separated into types based on their purposes such as office, industrial, multifamily, hotel and hospitality, land, retail, mixed use, and special purpose. There are many types of commercial spaces to fit different business needs, let’s take a closer look:
Lease Agreements for Office Space
Lease agreements for office space are used for non-retail use and are classified as low, mid, or high-rise properties and are based on the number of stories the building has. These properties are 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. Here is more information on office space leases:
- Type of Lease Agreement. Popular types of lease agreements used for office space include: a Gross Lease, a Modified Gross Lease or a Net Lease (Double Net Lease or Triple Net Lease).
- Common Leasing Terms to Negotiate or Include. CAM clause, Relocation clause, and Personal Guarantee Clause.
- Automatically Lease Renew. Not typically.
- Typical Length of Lease. The leasing term varies, and it can be from 6 months to a year or more.
Lease Agreements for Restaurants/Retail Stores
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 centers, community retail centers, power centers and mixed use. Below is more information on restaurant/retail leases:
- Type of Lease Agreement. Popular types of lease agreements used for restaurants/retail stores include: a Modified Gross Lease, Percentage Lease or a Net Lease (Double Net Lease or Triple Net Lease).
- Common Leasing Terms to Negotiate or Include. Competitor clause/Exclusivity clause, Insurance clause, Renovations/Repair clause. Restaurants might want to include a termination clause if permits/licenses can’t be obtained within the contingency period.
- Automatic Lease Renewal. Usually.
- Typical Length of Lease. The length of the lease depends on many factors; however, a typical restaurant/retail lease is approximately 3-10 years.
Lease Agreements for Multifamily Properties
Multifamily properties can serve as a residence, however, the general purpose of 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. Let’s take a look at the breakdown of lease agreements for multifamily properties:
- Type of Lease Agreement. In most cases, a Gross Lease will be used.
- Common Leasing Terms to Negotiate or Include. Lease renewal, Pet Policy, Alterations/Maintenance, and Subletting.
- Automatic Lease Renewal. Sometimes.
- Typical Length of Lease. Typically, one-year.
Lease Agreements for Industrial Properties
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. The most common types of industrial properties include heavy manufacturing properties, flex warehouse space, bulk warehouse space, and light assembly structures. Let’s look at a breakdown of lease agreements for industrial properties:
- Type of Lease Agreement. Popular types of lease agreements used for industrial properties include: a Gross Lease, a Modified Gross Lease or a Net Lease (Double Net Lease or Triple Net Lease).
- Common Leasing Terms to Negotiate or Include. Rent Escalation, Lease Renewal, Use Clause, Parking, and Environmental Indemnity.
- Automatic Lease Renewal. Sometimes.
- Typical Length of Lease. It depends but usually between 3-10 years.
How to Write a Commercial Lease Agreement
Below is a step-by-step sample of how to write a Commercial Lease Agreement.
I. DATE AND PARTY INFORMATION.
1. Insert the date the lease agreement was made.
2. Add the name of the lessor and the lessor’s address.
3. Add the name of the lessee and the lessee’s address.
II. DESCRIPTION OF LEASED PREMISES.
Insert the square footage of the leased premises.
5. Write the description of the type of space the lessee will be using the commercial space for.
6. Include the address of the leased premises.
7. Add descriptions of the property.
III. USE OF LEASED PREMISES.
8. Insert a description of the use and purpose of the leased premises.
IV. TERM OF LEASE.
9. Insert how many years and/or months the premises will be leased to the lessee.
10. Add the date the tenancy will begin.
11. Add the date the tenancy will end.
V. BASE RENT.
12. Write out the exact payment in words and write the exact payment in numbers of the net monthly payment that is due.
13. Write the day that the lease payment is due each month.
VI. OPTION TO RENEW.
14. Check this box if the lessee may not renew the Lease.
15. Mark this box if the lessee may have the right to renew the Lease. Add the total number of renewal periods and add how long each term will be.
16. Check this box if the rent will not increase after lease renewal.
17. If the increase is calculated by multiplying the Base Rent by the annual change in the CPI published by the Bureau of Labor Statistics by the most recent publication to the option period start date, check this box.
18. Mark this box if the rent renewal will increase by a percentage. Indicate the percentage increase.
19. Check this box if the rent renewal will increase by a fixed amount of dollars. Write out the dollar amount and number amount.
20. If this will be a Gross Lease, check this box. Include the tenant and landlord’s initials.
21. Check this box if it will be a Modified Gross Lease. Include the tenant and landlord’s initials.
22. Indicate if there will be monthly expenses that the lessee will be expected to pay besides the Base Rent.
23. Indicate the lessor’s monthly expenses that the lessee won’t have to pay for.
24. If this will be a Triple Net Lease, check this box. Additionally include the tenant and landlord’s initials.
25. Write out the exact amount in words and then write the exact amount in numbers of the amount of insurance the lessee shall maintain at all times for injury, death and property damage.
IX. SECURITY DEPOSIT.
26. Indicate the exact amount in words and write the exact amount in numbers of a security deposit that is due at the signing of the Lease.
X. LEASEHOLD IMPROVEMENTS.
27. Write the improvement exceptions that the lessee won’t be responsible for.
28. Insert how many days at which rent is in default and shall accrue a payment penalty.
29. Check this box if the payment penalty shall be at an interest rate. Write the percentage and write the number of the percentage per annum.
30. Check this box if a fixed amount will be charged as a late fee. Write the exact amount and include the dollar amount that the lessor will charge.
31. Insert the municipality of where the lessee shall get approval for any sign or advertising.
XIII. GOVERNING LAW.
32. Add the state where this Lease agreement shall be governed by law.
33. Insert the name and address of the lessor.
34. Insert the name and address of the lessee.
35. Write the date the lease agreement was executed.
36. The lessee should sign and print their name on this line.
37. The lessor should sign and print their name on this line.
XVI. NOTARY PUBLIC ACKNOWLEDGEMENT.
38. This section requires the notary public to acknowledge that they have met the lessor.
39. Have the notary public acknowledge that the lessee has appeared in person.
Commercial Lease Agreement Terms
Below are some common terms found within a commercial lease agreement:
- Americans with Disability Act (ADA). 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, etc.) 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).
- Common Area Maintenance (CAM) Fee. This cost is outlined in the lease agreement and usually broken down by square foot. It is the price the lessee pays to use common areas such as hallways, restrooms, or waiting areas.
- Exclusive Use. The lessor shall decide if they will give the lessee exclusive use of the property, meaning the lessee’s business would be the only business on the lessor’s property allowed to conduct that specific type of business.
- Escalation Clause. Long-term commercial leases typically require “escalations” or rent increases over a specified period—these can be negotiated and are outlined in the lease agreement.
- Lease Term. A leasing term determines how long the lease will be active. This includes the date the lease will begin and terminate and any renewal options/periods.
- Lessor. The property owner or landlord collects funds in exchange for leasing the commercial space.
- Lessee. The individuals or tenants who are paying the lessor a fixed amount of money in exchange for leasing the commercial space.
- Rent. The amount of money paid by the lessee. Commercial lease agreements specify the amount of rent due, when/where it’s due, acceptable forms of payment and any other expenses.
- Solvency. Describes the tenant’s rights if there is a foreclosure on the leased property.
- Zoning. Defines the zoning laws or other restrictions that apply to the premises.
Leasing a commercial property without written rules and expectations is an invitation for trouble. It is recommended to have your commercial lease agreement in writing.