What is a Commercial Lease Agreement?

Last Updated on November 4, 2023 by Amanda Lee

As a Head of Real Estate, you know that finding the perfect space for your business is a long and challenging process. After months of searching, evaluating buildings, and negotiating business terms, it all comes down to a lease. But not just any lease will do. You need a lease that protects your business and its interests.

A commercial lease agreement is a legal document and legally binding contract between a landlord and a tenant for the rental of a commercial property. This business lease outlines the terms and conditions that govern the use of the property for commercial purposes. Commercial lease agreements are used when leasing various types of commercial properties, such as retail spaces, office buildings, industrial warehouses, or mixed-use properties.

What to Look for in a Commercial Lease Agreement

So whether you’re just starting the lease negotiation process or you’re already deep in the weeds, here are some of the key terms and clauses to look for in a commercial lease agreement:

1. Rent: This is the amount of money you’ll pay the landlord each month. Be sure to negotiate a fair rent amount that reflects the value of the space and the terms of the lease. Commercial landlords often consider factors such as location, market demand, and property size when determining rent for commercial spaces.
2. Lease term: This is the length of time you’ll be responsible for paying rent. Be sure to negotiate a lease term that fits your business’s needs. Commercial leases typically range from one to ten years, depending on the type of commercial space and the nature of the business. The lease term should be clearly defined in the lease application or lease template.
3. Renewal options: If you think you might want to stay in the space for longer than the initial lease term, be sure to negotiate renewal options. This will give you the flexibility to stay in the space if your business is successful. Renewal options allow tenants to extend the lease for an additional term, usually with predetermined rent increases or negotiation terms. Including renewal periods and renewal terms in the lease agreement is important to secure future tenancy.
4. Use and occupancy: This clause specifies what you can and can’t do with the leased space. Be sure to negotiate a use and occupancy clause that allows you to use the space for your business’s intended purpose. Commercial lease agreement often have restrictions on activities that may disrupt other tenants or violate zoning regulations. Ensure that the lease agreement clearly outlines the tenant’s requirements and limitations in terms of usage.
5. Alterations and improvements: If you plan to make any alterations or improvements to the space, be sure to include this in the lease agreement. This clause will outline the conditions under which you can make alterations and who is responsible for paying for them. Landlords may require approval for structural changes or improvements to ensure compliance with building codes and preserve the property’s value. It’s crucial to have the details of alterations and improvements documented in the written agreement.
6. Maintenance and repairs: This clause outlines who is responsible for maintaining and repairing the leased space. It’s important to clarify which party is responsible for routine maintenance, repairs, and addressing any damages that may occur during the lease term. Negotiate for a clause that requires the landlord to maintain and repair the building’s structure and mechanical systems. Additionally, consider including provisions for property maintenance and operating costs in the lease agreement to determine the tenant’s obligations and the minimum amount they need to contribute.
7. Security deposit: The security deposit clause outlines the amount of money you need to pay upfront as a security deposit. Negotiate for a reasonable security deposit amount, and ensure that the agreement outlines the conditions for its return. The lease agreement should clearly state the total lease amount, including the security deposit and any other applicable fees.
8. Insurance and Indemnification: This clause outlines the insurance requirements for the leased space and who is responsible for providing it. It’s essential to ensure that you have adequate insurance coverage and that the agreement includes a mutual indemnification clause that protects both you and the landlord. Insurance coverage may include liability insurance, property insurance, and other specific types of coverage depending on the nature of the business. It’s crucial to address insurance and indemnification in the lease agreement.
9. Termination and Default: This clause outlines the conditions under which the lease agreement can be terminated and what happens if either party defaults on the agreement. Ensure that the termination and default clauses are reasonable and fair to both parties. Consider including provisions for automatic renewal or termination of the lease agreement upon certain conditions.
10. Assignment and Subletting: This clause outlines whether you have the right to assign or sublet the leased space to another party. Negotiate for a clause that allows you to sublet the space or assign the lease to another party if necessary. The lease agreement should clearly state the tenant’s rights and restrictions regarding assignment and subletting.
11. Dispute Resolution: Finally, the dispute resolution clause outlines the process for resolving any disputes that may arise during the lease term. It’s essential to ensure that the dispute resolution process is fair, efficient, and cost-effective. Consider including provisions for alternative dispute resolution methods, such as mediation or arbitration, to avoid lengthy and costly litigation.

These are just some of the key terms and clauses to look for in a commercial lease agreement.

Know your Commercial Lease Agreement Type Options

When considering a commercial lease agreement, it’s crucial to understand the different types of leases available. The type of lease you choose will have a significant impact on your rights, responsibilities, and financial obligations as a tenant. Understanding the differences between lease types will help you make informed decisions and choose the one that best aligns with your business needs. From gross leases to a single net lease or triple net leases, modified gross leases to percentage leases, each type has its own implications for rent structure, operating expenses, and tenant responsibilities. By exploring the different lease types, you can gain a comprehensive understanding of the options available and select the most suitable lease agreement for your business.

Leverage a Proposal Template and Professional Guidance

Given the complexity of the negotiation process, having a go-to proposal template is imperative can help ensure you are best positioned throughout. This proposal will outline your business’s key terms that will ultimately go into the lease and will serve as a valuable reference to ensure that what was agreed to is fully represented. By utilizing a proposal template, you can articulate your requirements, preferences, and expectations clearly.  

Be sure to have a real estate attorney or broker review the lease agreement before you sign it. They can help you understand the terms and negotiate the best possible deal for your business. Their experience and knowledge in commercial lease agreements will help you navigate potential pitfalls and ensure that you enter into a fair and mutually beneficial contractual relationship with the landlord.

By combining the use of a go-to proposal template and seeking professional review, you can strengthen your position during negotiations, safeguard your interests, and maximize the potential benefits of the commercial lease agreement.