Leasing commercial space is a significant financial commitment. Business owners should pay close attention to the terms of a commercial rental agreement.
There are many issues to consider before signing a business lease agreement. Below, we list our top three.
What is the term of the lease?
Be clear on when the lease term starts and ends. While this may seem obvious, you should clarify whether you will be allowed access to the property before the start date to complete renovations or leasehold improvements. Negotiation is key – the landlord may agree to provide you this access rent-free or at a reduced rate to induce you to rent.
Also determine whether you will have the option to renew at the end of the term and consider whether it is advantageous to agree in advance on how the rent will be calculated if you exercise your renewal option.
How much will the commercial tenant have to pay?
Commercial rental agreements can have a range of different payment terms:
- In a gross rent lease, the tenant pays a flat fee to cover base rent and all incidentals.
- In a percentage rent lease, the tenant pays a base rent plus a percentage of gross sales over a certain amount.
- In a net lease, the tenant pays a base rent plus certain expenses, depending on the type of lease:
- Net lease: tenant pays base rent and some property taxes
- Double net lease: tenant pays base rent, property taxes and insurance
- Triple net lease: tenant pays base rent, property taxes, insurance, utilities and may be responsible for other maintenance fees or operating costs
Consider all of the types of expenses involved in renting a commercial space, like HVAC and/or AC service, general repairs, parking, snow removal, lawn maintenance, or cleaning. An effective commercial lease agreement will explicitly address who is responsible for what.
In what circumstances can the lease be terminated?
A good commercial tenancy agreement will clearly address the circumstances under which the parties can end the lease. For example:
- If business does not turn out as expected (or turns out even better than expected and you need more space!), what are your rights for terminating the lease before its term expires? How much notice are you required to give to break the lease? Will you be liable to pay an early termination penalty? Do you have the right to sublet all or part of the premises to avoid the penalty or offset rent?
- Can the landlord terminate early, and for what reasons? What are your rights if the landlord breaks the lease early?
- When the lease ends, what are your obligations? Commercial lease agreements typically require tenants to leave the premises clean and in good repair. A well-drafted lease will also specify which improvements or fixtures (shelving, displays, signs, refrigerators, stoves, sinks, etc.) can be removed by the tenant.
There are many other issues arising from commercial rental agreements. Before signing on the dotted line, consider having a commercial lawyer review it first.