Commercial Lease Agreements: Everything Tenants Need to Know

Last Updated on March 28, 2024 by Morgan Beard

Entering into a commercial lease agreement is a significant decision for any business. It involves a legally binding contract that outlines the rights, responsibilities, and obligations of both the tenant and the landlord. This agreement governs the terms of occupancy, rent payments, and other critical aspects of the leased property. Understanding the nuances of commercial lease agreements is crucial for tenants to make informed decisions and protect their interests.

What is a Commercial Lease Agreement?

A Commercial Lease Agreement is a legally binding contract that delineates the rights, responsibilities, and obligations of both the landlord and the tenant. When the landlord leases commercial real estate property to a business tenant, this agreement serves as the governing document that defines the terms and conditions, under which the tenant is permitted to occupy and utilize the leased premises for commercial purposes. 

This type of legal document sets the expectations and parameters for various aspects of the landlord-tenant relationship, including rent payments, maintenance requirements, permitted uses of the property, and the duration of the tenancy. By clearly outlining these critical elements, a Commercial Lease Agreement aims to protect the interests of both parties, facilitate a mutually beneficial arrangement, and provide a framework for resolving potential disputes or conflicts that may arise during the lease term. 

Types of Commercial Lease Agreements

Commercial lease agreements come in various forms, each with its own set of terms and conditions that define the responsibilities and obligations of the tenant and the landlord. Understanding the different types of commercial leases is crucial for tenants to make informed decisions and select the agreement that best aligns with their business needs and financial capabilities. 

The most common types of commercial leases include gross leases, net leases, modified gross leases, percentage leases, and triple net leases. Each lease type has distinct characteristics regarding the allocation of operating expenses, rent calculation methods, and the degree of control and flexibility afforded to the tenant. Exploring the nuances of these lease types will help tenants navigate the leasing process more effectively and negotiate favorable terms.

Gross Lease 

Under a gross lease agreement, the tenant pays a fixed rent amount, and the landlord is responsible for covering most operating expenses, such as property taxes, insurance, and maintenance costs. This type of lease is relatively straightforward for tenants, as they have a predictable monthly rent payment.

Net Lease

In a net lease agreement, the tenant is responsible for paying a portion or all of the operating expenses in addition to the base rent. These expenses can include property taxes, insurance, and maintenance costs. Net leases can be further categorized as single net, double net, or triple net leases, depending on the specific expenses the tenant is responsible for.

Modified Gross Lease 

A modified gross lease is a hybrid of a gross and net lease. The tenant pays a base rent, and the landlord covers a portion of the operating expenses. Any additional expenses beyond the agreed-upon amount are the responsibility of the tenant.

Percentage Lease

A percentage lease is commonly used in retail settings, where the tenant pays a base rent plus a percentage of their gross sales. This type of lease allows the landlord to share in the tenant’s success, as the rent increases when sales are higher.

Triple Net Lease

In a triple net lease (NNN), the tenant is responsible for paying all operating expenses, including property taxes, insurance, and maintenance costs, in addition to the base rent. This type of lease places a significant financial burden on the tenant but also provides more control over the property.

As outlined here, there are  several types of commercial leases that landlords and tenants can enter into, each with its own advantages and disadvantages. In our blog post titled Commercial Lease Types Explained, we dive deeper into each lease type and the 

Key Lease Terms and Definitions

Before executing a commercial lease agreement, it requires a solid understanding of the key terms and definitions that govern the contractual relationship between the tenant and the landlord. These terms serve as the foundation for the agreement, outlining the rights, responsibilities, and obligations of both parties. From the rent structure and lease duration to the allocation of expenses and maintenance responsibilities, each term plays a crucial role in shaping the overall lease conditions. 

Familiarizing yourself with these key terms and definitions will empower you to negotiate more effectively, ensure compliance with the lease provisions, and make informed decisions that align with your business goals and financial considerations. By simplifying the legal jargon and comprehending the practical implications of these terms, you’ll be better equipped to navigate the leasing process with confidence and safeguard your interests as a commercial tenant.

Rent Expense

The rent is the amount the tenant pays to the landlord for the use of the leased property. It can be a fixed amount or a combination of a base rent and additional charges, depending on the lease type.

Lease Term

The lease term is the duration of the agreement, typically ranging from one year to several years. It specifies the start and end dates of the tenancy.

Common Area Maintenance (CAM)

Common Area Maintenance (CAM) charges cover the expenses associated with maintaining shared areas, such as parking lots, lobbies, and common spaces. These charges are typically paid by the tenant in addition to the base rent.

Additional Rent or Fees

Commercial leases may include various fees, such as security deposits, late fees, or administrative fees. It’s essential to understand the purpose and amount of each fee to avoid unexpected costs.

Security Deposit

A security deposit is a refundable amount paid by the tenant to the landlord at the start of the lease. It serves as a safeguard against any damages or unpaid rent and is typically returned to the tenant at the end of the lease term, subject to any deductions for damages or outstanding charges. This can be a lofty sum of money up front, so letters of credit from your bank is one strategy to guarantee a commercial tenant’s ability to fulfill its financial obligations to the landlord. 

Use Clause

The use clause specifies the permitted use of the leased property. It outlines the types of businesses or activities allowed on the premises and may include restrictions or limitations.

Renewal Options

Renewal options allow the tenant to extend the lease term beyond the initial lease period. These options should be clearly defined in the lease agreement, including the terms and conditions for exercising the renewal.

Lease Expiration and Holdover Tenancy

Your lease expiration date is arguably the most important critical date that a commercial tenant tracks. The lease expiration date is when a commercial lease agreement officially ends and the tenant’s right to occupy the leased premises expires. This date is clearly stated in the lease agreement and marks the conclusion of the agreed-upon lease term, whether it’s a fixed period (e.g., a 5-year lease) or a month-to-month tenancy. However, in some cases, tenants may wish to continue occupying the premises beyond the lease expiration date. This situation is referred to as a “holdover tenancy.” Or they will re-negotiate a lease renewal with the landlord. 

Assignment and Subletting

The assignment and subletting clauses outline the tenant’s rights and restrictions regarding transferring the lease to another party or subletting a portion of the leased premises.

It’s essential to understand your rights and obligations within your commercial lease agreement tenancy. Many commercial leases include provisions that govern the conditions under which a tenant can remain in the premises after the lease term ends. These provisions may outline the process for renewing the lease or continuing on a month-to-month basis, as well as any potential penalties or rent increases that may apply.

Critical dates, clauses, rent structure and your tenant rights can keep you on your toes, especially as you sign more real estate lease agreements. Our Critical Date Management Glossary gives you a snapshot of some of the most common key terms and critical dates to stay on top of.

Negotiating a Commercial Lease

The negotiation phase of commercial leasing is where you put your leasing knowledge to the test — working to secure favorable lease terms and executing a lease agreement that is mutually beneficial to both the tenant and the landlord.

Securing favorable terms in a commercial lease is a complex process that requires careful preparation, strategic planning, and a thorough understanding of your operational needs and financial constraints. Entering into negotiations armed with the right knowledge and a clear set of priorities can empower you to navigate the process effectively and achieve a lease agreement that aligns with your business objectives. 

From determining the optimal lease term and negotiating rent rates to addressing clauses related to maintenance responsibilities and renewal options, each aspect of the negotiation requires a thoughtful approach. By leveraging the expertise of legal professionals, tenant-representative brokers, and market insights, you can increase your negotiating power and secure lease terms that provide flexibility, scalability, and potential cost savings for your business.

Understanding your needs and priorities

Before entering into lease negotiations, it’s essential to have a clear understanding of your business’s needs and priorities. Consider factors such as location, space requirements, growth projections, and budget constraints.

Seeking legal advice

Commercial lease agreements are complex legal documents. Consulting with a qualified real estate attorney can help you understand the terms and ensure that your interests are protected.

Partnering with a Tenant-Rep Broker

A tenant-representation broker can be a valuable asset during the lease negotiation process. They have in-depth knowledge of the market and can represent your interests while negotiating favorable terms.

Negotiating Lease Term

The lease term can significantly impact your business’s long-term plans and financial obligations. Consider negotiating a term that aligns with your growth projections and provides flexibility for potential expansions or relocations.

Site Selection Strategy

Develop a strategic site selection plan that takes into account factors such as accessibility, visibility, parking, and proximity to your target market. This will help ensure that the leased property meets your business’s needs.

Rights of Tenants

As a commercial tenant, understanding your rights under your lease agreement is crucial. These rights serve as a safeguard, protecting your interests and ensuring that you can fully utilize and benefit from the leased premises. While the specific rights may vary depending on the terms of the lease and the applicable local or state laws, understanding your fundamental rights as a tenant is essential for maintaining a balanced and fair relationship with the landlord. 

From the right to access and occupy the premises to the ability to make improvements or seek lease renewals, these provisions empower tenants and provide a legal framework for addressing potential disputes or conflicts. Familiarizing yourself with your rights as a tenant not only fosters a better understanding of the lease agreement but also equips you with the knowledge necessary to assert your entitlements and protect your business interests throughout the duration of the lease.

Access to the Premises

As a tenant, you have the right to access and occupy the leased premises during the agreed-upon term. The lease agreement should outline any restrictions or limitations on access.

Right to Make Improvements

Depending on the terms of the lease, you may have the right to make improvements or alterations to the leased premises. However, it’s essential to obtain the landlord’s approval and follow any guidelines outlined in the agreement. Often times tenant improvement allowances are negotiated as a way to offset upfront costs for customizing or refurbishing a commercial space to meet the tenant’s specific needs and requirements. These allowances can cover expenses such as interior renovations, installation of fixtures, or upgrading infrastructure, thereby enabling tenants to tailor the leased premises to their business needs. In the accounting world, these are known as leasehold improvements and have a material impact on your accounting team’s financial calculations.

Lease Termination and Renewal Options

Most commercial leases include provisions for termination and renewal options. It’s crucial to understand these clauses to ensure that you can exercise your rights appropriately and avoid potential penalties or legal disputes.

Common Pitfalls to Avoid

Every commercial lease agreement is unique, there are several common pitfalls that tenants often overlook or fail to anticipate, leading to unforeseen challenges, financial burdens, or legal disputes down the line. Whether it’s failing to thoroughly understand the lease terms, ignoring maintenance responsibilities, or neglecting to consider future growth needs, these missteps can have far-reaching consequences for your business operations and bottom line. Identifying and avoiding these pitfalls from the outset is crucial to ensure a smooth and successful tenancy. By being proactive and vigilant throughout the leasing process, you can mitigate risks, protect your investments, and establish a solid foundation for your business to thrive within the leased premises.

Failing to Understand Lease Terms

Thoroughly reviewing and understanding the lease terms is crucial to avoid potential legal issues or financial burdens. Seek clarification on any unclear or ambiguous clauses before signing the agreement. Ask for help or a clear explanation of the legal jargon or critical lease terms. This is where partnering with a legal expert and a tenant-rep broker is imperative. They are your trusted advisors and support system in understanding your commercial  lease agreements prior to signing.

Ignoring Maintenance Responsibilities

Neglecting maintenance responsibilities can lead to costly repairs and potential disputes with the landlord. Ensure that you understand and fulfill your obligations as outlined in the lease agreement. Oftentimes, the ongoing property maintenance, utility costs and common area maintenance fees are passed to the tenant. This is where your monthly costs can skyrocket. 

Not Considering Future Needs

While focusing on immediate needs is essential, it’s also crucial to consider your business’s potential growth and future requirements. Anticipate changes and negotiate lease terms that provide flexibility and scalability. The commercial building space that suits your business needs now, may not be the space that you need in one, two or three years from now. Many times when you sign a lease agreement, it’s for a minimum 5 or 10 year lease term. So it’s imperative to have a vision for that space that facilitates any potential organizational changes in your business model. This is also why negotiating a favorable lease termination clause is so valuable to the tenant. 

Skipping Legal Review

Failing to have a qualified legal professional, like a contract lawyer, review the lease agreement can expose your business to significant risks. A legal review can identify potential issues and help protect your retail space or office space interests. By identifying ambiguities, discrepancies, or unfavorable clauses, a legal review can enable you to negotiate more favorable terms or seek clarification on ambiguous provisions. Additionally, legal experts can offer valuable insights into local regulations, legal requirements, industry standards, and best practices, helping you make informed decisions that mitigate risks and safeguard your business interests.

Commercial Lease Agreements Summarized

Entering into a commercial lease agreement is a big commitment. You could even call it a marriage between tenant and landlord. And you’ll want to make sure that marriage is equitable for both parties. 

Understanding the key elements and negotiating strategies can help tenants secure favorable terms and protect their business interests. By thoroughly reviewing the lease terms, seeking legal advice, and partnering with knowledgeable professionals, tenants can make informed decisions and mitigate potential risks. Remember, a well-negotiated commercial lease agreement is crucial for the success and growth of your business.