Commercial Lease Agreements: What You Need to Know

Commercial Lease Agreement

Even if e-commerce is the newest thing this century, every business operation still has to have a physical location where clients can see your goods, get to know you, and grow devoted to your brand. Nonetheless, tenants and business owners are frequently perplexed by the entire discussion around the rental of personal vs commercial property.

Let’s talk about the amazing idea of commercial lease agreements so you know what to anticipate from these legal contracts.

What is a commercial lease agreement?

A commercial lease agreement is a written agreement between the landlord or property owner and the tenant or lessee. This legally enforceable agreement indicates that the tenant will no longer be occupying a piece of commercial real estate for use in their day-to-day company activities.

A residential lease arrangement, in which the leased premises may only be used for residential purposes, is substantially different from a commercial leasing deal. Commercial leased properties are subject to ordinances that prohibit the lessee from using the space for residential purposes. The only permitted uses of the commercial property are manufacturing, warehousing, office space, and other commercial uses combined with communal areas.

Commercial lease agreements come in a variety of forms, each with precise provisions on the net lease, usage measured in square feet or entire blocks, length of the lease, rent payment procedures, permission to store hazardous items, and tenant exclusivity. If you’re a new renter, you should definitely get legal counsel because the laws that govern lease terms are quite strict.

Pay close attention to the terms and circumstances of the legal documents, taking note of any waivers, warranties, conditions on tenant defaults, property damage, periodic rent increases, based rent, additional fees, and any penalties related to sublease.

Businesses should employ commercial lease agreements rather than buy real estate since they are less expensive and allow you to relocate your operations at any moment by simply ending the lease.

What are the types of commercial lease agreements?

There are six different kinds of commercial leases. Let’s explore them now:

1. Net Lease or N-lease

In addition to the agreed-upon monthly rent, the tenant in a net lease is also liable for any or all property taxes, maintenance fees, and property insurance.

2. Double Net Lease or NN-lease

The tenant is required to pay the basic rent, any applicable property taxes, and property insurance, according to the terms of the double net lease.

3. Triple Net Lease or NNN-lease

Tenants shall pay base rent plus any incurred maintenance costs under the provisions of the triple net lease, also known as the NNN agreement. In addition, they have to provide property taxes and insurance for the rented space that the company uses.

4. Absolute Triple net lease

The Absolute NNN-lease is a comprehensive contract in which the tenant’s company is required to cover all expenses and the landlord is released from all liability. Base rent, property taxes, upkeep expenses, and property insurance are all included. In addition, the renter can be responsible for covering any losses or damages to their property as well as any maintenance or repair expenses for the building’s common facilities.

5. Gross Lease

A fully-serviced lease is another term for a gross lease or commercial lease. These are used for brief leases, during which the renter is exempt from paying all additional fees separately. Rather, an inclusiveness clause that covers both the base rate and any additional fees that might be assessed in certain situations is included in the rent sum.

6. Percentage Lease

Because it gives property owners a share of the tenant’s company revenues, a percentage lease is the most advantageous option. It implies that in addition to paying rent for the use of the leased space, the tenant also gets to keep a set portion of the company’s earnings.

Which key clauses are present in a commercial lease agreement?

Specific terms of the lease are included in a business leasing agreement. In the event that a tenant breaches these conditions, the property owner has the legal right to impose penalties or ask for an early vacancy, depending on the nature of the breach.

When you sign a commercial lease agreement, pay attention to the following key provisions of the lease:

1. Duration of the lease

Based on the lessee’s demands, the landlord and renter decide on the length of the lease in advance. Short-term leases are an option for fledgling firms, but long-term leases are typically preferred by landlords because of the assured payment.

For successional business models, a typical commercial lease agreement’s term can vary from one year to one hundred years.

2. Base rent and monthly rent

For an entire year, a lessee can pay a fixed amount of rent known as the base rent. The sum must be stated in the commercial lease agreement to two decimal places, nevertheless, if the renter and property owner decide on a monthly rent payment instead.

Additionally, the lease must specify whether or not utilities, maintenance, insurance, property taxes, and other expenses are included in the rent. The owner must indicate the amount that the renter is required to pay for these costs if the rent does not include them.

The deadline for rent payment as well as any additional fees associated with a tenant’s payment default must be included in the commercial lease agreement.

3. Security deposit

When a tenant signs a lease, they pay the property owner the security deposit.

If the owner plans to deduct costs for damages to property, early termination of the lease, altered gross leasing rates, and extra maintenance costs. It must also state whether any warranties or waivers are present.

4. Rent increases

Generally speaking, commercial property leasing rent increases by a certain amount annually. To extend the time between escalations, the landlord and renter may negotiate this term.

The percentage increase, the intervals between rent increases, and any waivers for these increments must all be specified in the commercial lease agreement.

5. Details of the commercial property

Every detail regarding the property must be included in the commercial leasing agreement. The square footage of the property, the common facilities that are accessible for usage, any parking spaces allotted to the tenant, and—above all—the precise address of the leased premises are all details that the lessor is required to disclose.

6. Signage for the leased commercial space

Certain lessors feel uneasy having signs on their land. The commercial leasing agreement must contain this information, and the conditions of the lease must be adjusted if the tenant’s business requires signage.

The lessor may also designate the type of signage that they allow or do not accept, as well as the maximum size sign that the tenant may erect.

7. Usage of common areas and utility bills

A communal area surrounding the commercial space will be available to any businesses within the building. The agreement must include information on this area’s usage and any associated utility costs.

The landlord may offer to cover common area utilities or expressly state in the lease that the renter is responsible for all expenses. In order for both parties to be clear on the usage, it is also necessary to specify and include in the commercial lease agreement the use of this common area for things like hanging signs and setting up seating.

8. Repairs and improvements to the property

A business entity might need to make changes to the commercial property in order to make it work for it. If this is the case, the commercial lease agreement needs to make it clear who is responsible for paying for these upgrades and changes—the lessor or the lessee.

It must also specify who would pay for any necessary repairs. If the tenant is allowed to make their own modifications, they may also have to return the business space to its initial state prior to ending the lease.

Conclusion

For a tenant’s business, commercial leasing agreements are an absolute requirement. According to the rules of the lease, there is a give and take between the landlord and the tenant, and if either party breaks the terms of the agreement, they will both be held accountable.

Of course, the lease terms also cover other important details like who is responsible for paying property taxes, how long the tenant will be occupying the space, whether subletting is permitted, the base rent and security deposit, and utility expenses for shared areas. Essentially speaking, though, business lease agreements lower the costs incurred by the tenant in comparison to monthly rent and streamline the renting procedure.

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Commercial Lease Agreements: What You Need to Know