Commercial Lease, What you need to know

As your business grows, you may start investigating moving your business from your home to a commercial space and with that comes the commercial lease.   For many people this is a new experience and it differs significantly from renting a residential space, as a result, many first time commercial renters sign bad leases.  In an effort to clear up the confusion,  this article should help you make the right decisions.  As always, please consult with a lawyer and/or your Realtor before signing any leases.

How Does a Commercial Lease Differ from Residential Lease?

It’s crucial to understand, practically and legally speaking, commercial leases and residential leases are quite different. Here are the main differences between them:

  • Fewer consumer protection laws. Commercial leases are not subject to most consumer protection laws that govern residential leases — for example, there are no caps on security deposits, rules protecting a tenant’s privacy or obligations to fix anything.
  • No standard forms. Many commercial leases are not based on a standard form or agreement; each commercial lease is customized to the landlord’s needs. As a result, you need to carefully examine every commercial lease agreement offered to you.
  • Long-term and binding. You cannot easily break or change a commercial lease. It is a legally binding contract, and a good deal of money is usually at stake.
  • Negotiability and flexibility. Commercial leases are generally subject to much more negotiation between the business owners and the landlord, since businesses often need special features in their spaces.

Making Sure the Commerical Lease Will Fit Your Business

Before you sign a lease agreement, you should carefully investigate its terms to make sure the lease meets your business’s needs.

First, consider the amount of rent — make sure you can afford it — and the length of the lease. You probably don’t want to tie yourself to a five- or ten-year lease if you can help it; your business may grow faster than you expect or the location might not work out for you. A short-term lease with renewal options is usually safer.  Many short term leases 12-24 months, usually have higher lease rates.

Also think about the physical space. If your business requires modifications to the existing space — for example, adding cubicles, raising a loading dock, or rewiring for better communications — make sure that you (or the landlord) will be able to make the necessary changes.

Other, less conspicuous items spelled out in the lease may be just as crucial to your business’s success. For instance, if you expect your camera repair business to depend largely on walk-in customers, be sure that your lease gives you the right to put up a sign that’s visible from the street. Or, if you are counting on being the only sandwich shop inside a new commercial complex, make sure your lease prevents the landlord from leasing space to a competitor.

Critical  Commercial Lease Terms

The following list includes many items that are often addressed in commercial leases. Pay attention to terms regarding:

Lessor

The lessor is the person who is granting the lease and who has the legal obligations related to the lease contract; the landlord. Sometimes this is an owner, but it may also be a property management company or commercial leasing company.

Lessee

The lessee is the person leasing the space; the tenant. Although you may need to personally guarantee a lease, your business entity should be the official lessee on all documents relating to the lease.

Common Area Maintenance (CAM)

This term describes costs for areas in a building which are not directly leased but which are a common responsibility, such as hallways, restrooms, stairways, and walkways. Most lessors add CAM costs to square footage costs to calculate lease payments.

Fully Serviced Lease

A lease in which the rental payment includes other services, such as utilities, maintenance, and lawn/snow removal services. The landlord pays these fees and passes them on to the tenants in the lease. This can be a benefit to tenants as it saves from having to pay these additional fees, but the landlord may be charging more than actually is being paid for these services.

Gross Lease

A lease which that states the landlord agrees to pay for all common expenses, including utilities, repairs, insurance and (occasionally) property taxes. The cost of a gross lease is higher than for other types of leases because all of these items are included in the amount of the lease.

Net Lease

A lease which includes the square footage costs, CAM costs, and all other ownership expenses, including utilities, repairs, insurance, and property taxes.

Double Net Lease

A lease in which taxes and insurance expenses are included in the lease payment. The lessor pays maintenance costs.

Triple Net Lease (NNN)

A lease which includes all taxes, insurance, and maintenance costs in the monthly payment.

Gross Square Foot

The total square footage of the building or office being leased. This figure usually includes common space.

HVAC

An abbreviation for ‘heating, ventilating, and air conditioning.’ It’s often pronounced as “H-VAC.”   This is the costliest mistakes many commercial tenants ignore.  If the HVAC unit for the building needs to be repaired and replaced, make sure you know who is responsible the the cost of the repairs. Many lease hold the tenant responsible for repairs.

Access

Just because you are leasing a space, does not guarantee that you have 24/7 access to your new office or warehouse.  Make sure that your contract meets your requirements.

Turn-key

An office or building that is ready to occupy. In most cases, this is a commitment by the landlord to bear the cost of any build-out.

Miscellaneous Items:

  • The length of lease (also called the lease term), when it begins and whether there are renewal options
  • Rent, including allowable increases (also called escalations) and how they will be computed
  • Exactly what space you are renting (including common areas such as hallways, rest rooms, and elevators) and how the landlord measures the space (some measurement practices include the thickness of the walls)
  • Whether there will be improvements, modifications (called build outs when new space is being finished to your specifications), or fixtures added to the space; who will pay for them, and who will own them after the lease ends (generally, the landlord does)
  • Whether there’s an option to renew the lease or expand the space you are renting
  • If and how the lease may be terminated, including notice requirements, and whether there are penalties for early termination, many commercial leases require 3 or months notification of termination.

The Americans with Disabilities Act. The Americans with Disabilities Act (ADA) requires all businesses that are open to the public or that employ more than 15 people to have premises that are accessible to disabled people. Make sure that you and your landlord are in agreement about who will pay for any needed modifications, such as adding a ramp or widening doorways to accommodate wheelchairs.

I hope this blog helps you make the right choices when leasing your commercial space.

Jean Murray

Jean Murray

Author - Legal Expert at Executive Sellers Realty
Jean Murray has the education and experience to help you become an expert in your small business, and to provide you with information about business legal and tax issues. Ms. Murray holds an MBA and a PhD in entrepreneurship, she brings almost 30 years of experience and knowledge to these important business subjects.
Jean Murray

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