Commercial Leases: An Introduction for Small Businesses and First-Time Tenants

For any small- or medium-sized business owner, the decision to sign a lease agreement for commercial space is one of the most significant decisions the owner will make. The decision involves finding adequate space in the right location, paying rent and related charges that may be a major budget expense, and entering into a long-term lease agreement. Because the decision to lease commercial property is so important, every small-business owner or first-time tenant needs to understand the basics of commercial leases and seek advice from a legal professional. This post provides a basic introduction to commercial leases and their key terms and considerations. Please keep in mind, however, that a brief post is not a substitute for advice from a legal professional and the due diligence needed to make an informed decision.

What is a Commercial Lease?

In short, a commercial lease is a legally binding contract between a landlord and a business tenant setting forth the terms and conditions for the tenant’s right to occupy and use a commercial property. Because it involves real property, the lease must be in writing. The types of properties covered by commercial leases include office space, retail stores, warehouses, and industrial facilities.

Key Provisions of a Commercial Lease

The following are some of the key provisions in a commercial lease agreement that business owners need to consider before signing a lease:

1. Lease Term: The “term” of a lease refers to the duration of the lease agreement. Although the term of a commercial lease can be very short (a few months), many commercial leases have terms as long as five or ten years. A five- or ten-year lease is a significant commitment, which is why a business owner needs to make sure the lease agreement allows assignment of the lease.

2. Rent: Rent is the amount paid by the tenant in return for the landlord’s agreement to lease the property or space. Typically, rent must be paid monthly, but quarterly and annual rent payments are occasionally used. In long-term leases, the rent may increase annually over the term of the lease. See below for more on rent provisions and expenses that may be added to rent in some commercial leases.

3. Security Deposit: The landlord may require a security deposit to cover property damage or unpaid rent. A fair and balanced lease agreement will outline the amount and conditions for its return.

4. Use Clause: The lease agreement will define how the space can be used. This usually aligns with the zoning regulations where the property is located and protects the landlord’s interests by ensuring that the tenant's business complies with the regulations.

5. Termination Clause: A termination clause sets forth conditions that allow one party to terminate the lease before the end of the lease term. These clauses usually require some cause (a reason) for termination based on the other party’s action or failure to act, such as a landlord’s failure to make a repair or a tenant’s failure to pay rent. A termination clause may include a notice requirement that gives the other party a chance to correct the issue and may include penalties for termination.

6. Maintenance and Repairs: Commercial leases vary when it comes to whether the landlord or the tenant is responsible for maintenance and repairs. In general, the landlord tends to have more responsibility for maintenance and repairs in leases for office and retail space.

Rent Provisions in Commercial Leases

In leases of commercial properties, the landlord is often in a position to negotiate terms that require the tenant to pay some expenses related to the property. The following are three common approaches to rent provisions:

1. Gross Lease: In a gross lease, the tenant pays a fixed amount for rent, and the landlord is responsible for most or all expenses such as utilities, maintenance, and property taxes.

2. Net Lease: Under a net lease, the tenant must pay a portion of the property expenses in addition to rent. Common net leases include:

   1. Single-Net Lease: Under single-net leases, the tenant must pay a set amount for rent plus the property taxes.

   2. Double-Net Lease: The tenant must pay a fixed amount for rent as well as property taxes and insurance.

   3. Triple-Net Lease: Under triple-net leases, the tenant must pay the amount set for rent, plus the property taxes, insurance, and maintenance costs.

3. Percentage Lease: Under a percentage lease, the landlord is paid a percentage of the tenant's sales in addition to base rent. These are common in leases for retail space.

Considerations When Entering a Commercial Lease

For the small-business owner or first-time tenant, many factors need to be considered before signing a commercial lease agreement. Among other factors, these include:

1. Location: The property's location can significantly impact a business's success. A commercial real estate agent can help business owners find available space or property in a good location for the business.

2. Zoning Regulations: Business tenants need to consider whether the property is zoned for the intended commercial use. Zoning laws affect the types of businesses that can operate in a given area.

3. Negotiation: Commercial leases are often negotiable. Don't hesitate to discuss terms with the landlord to reach a mutually beneficial agreement.

4. Legal Review: Before signing a lease, it's wise to have a legal professional review the document. They can help identify potential issues and ensure your interests are protected.

5. Future Growth: Consider your business's future needs. A lease that allows for expansion or subleasing can provide flexibility as your business grows.

Conclusion

The decision to enter into a commercial lease agreement is one of the most important decisions a small-business owner will make. By learning about key provisions, types of leases, and important considerations, along with the advice of a legal professional, the business owner can make an informed decision that supports the business's goals and objectives. Attorney James D. Griffith at Endurance Business Law, PLLC, can review proposed leases and provide advice and guidance on the legal aspects of commercial leases. To set up a paid consultation, please call our office at (480) 997-2951 or use our Contact form. If we establish an attorney-client relationship, the consultation fee will be deducted from the fees for our services.