A commercial lease agreement is a contract between a landlord and a tenant for the lease of commercial property. Both the landlord and tenant should carefully consider the terms the agreement before signing as an agreement that is signed by both parties becomes a legally binding contract.
The parties to a lease are the landlord and a tenant. The landlord is the rental property owner, his agent, or a rental management company. The landlord agrees to allow the tenant to use the commercial property to conduct business. The tenant is a business or its owner(s) who pays rent to the landlord for commercial use of the property.
The lease agreement is the written or oral contract that contractually binds the parties. While lease agreements may be made orally, they are generally placed in writing. The specific terms of the agreement along with state or local laws govern the agreement.
Standard Lease Terms
Generally, standard commercial lease terms may include:
- the parties’ names, including the name of the business if the business is leasing the property
- a description of the property
- the lease term
- when the lease begins and ends
- amount of rent, and if rent increases are allowed
- how rent is calculated (flat rate, per square foot, etc.)
- acceptable forms of payment
- the rent’s due date
- penalties for late rent payments
- amount of the security deposit
- other deposits required, such as garbage disposal
- acceptable property uses
- responsibility of each party to pay utilities such as water, heat, electricity
- exclusive use of property (freedom from competing businesses)
- physical modifications, build-outs, or improvements to the property
- the parties’ responsibilities for repair and maintenance
- early lease termination
- sign specifications, size, placement, etc.
- lease termination notices
- the payment of costs and fees associated with a lawsuit regarding the lease
- maintenance of liability and property insurance
- responsibility of the parties to keep the premises secure
- renewal options
- subletting options, and
- the circumstances under which the landlord may enter the property
Differences Between Residential and Commercial Leases
Residential and commercial leases vary in different respects. A commercial lease may involve more negotiation due to the special requirements of the business. There may also be more flexibility written into the lease. However, unlike residential leases, there are fewer consumer protection laws that apply. As well, commercial leases tend to be for longer periods of time and are generally more difficult to terminate.
Considerations for Tenants
Business tenants should consider various factors when determining whether a commercial property is appropriate for their needs. For example, the business should consider the type of space needed to conduct business, such as a warehouse or retail location and whether the space needs to be modified or built-out to meet the needs of the business. The appearance of the building itself, inside and out, may also be important.
Another consideration is the location of the business. Does it need to be in a certain area, near other types of businesses, or is the location flexible? Another factor to consider is whether other businesses should be located nearby to provide goods and services for the business.
The forming of a commercial lease is an important step and consideration when operating a business. Various terms must be agreed upon such as the length of the lease, the rent amount, when rent is due, lease termination, and physical alterations. Ultimately, the success of a business may hinge upon whether the business is in a good location and enjoys favorable lease terms.