A commercial lease is a contract between a business and a landlord for the rental of property. Many businesses choose to rent their storefront space instead of buying it because it requires less capital. Entering into a commercial lease is a huge decision that can make or break your business.
If you are considering entering into a lease for a commercial space, there are certain things that you need to know about how commercial leases are different from residential leases, and you should understand and agree with the basic terms of the lease agreement.
How are Commercial Leases Different From Residential Leases?
One of the biggest differences between commercial leases and residential leases is the nature of the property that is being rented. Commercial lease terms are specifically drafted with the goal of running and maintaining a business on the property, while residential leases are designed for the enjoyment of a tenant’s personal time and space. Although the two leases will have some elements in common, like rent and security deposits, commercial leases tend to be a little more complicated.
Commercial leases offer certain significant differences from residential leases, including:
- Fewer Legal Protections: Certain consumer protection laws that apply to residential leases do not apply to commercial leases. For example, there may be no caps on security deposits or rules protecting a tenant’s privacy;
- No Standard Forms: While landlords in residential situations can use standardized forms because there is little need to accommodate the needs of each specific tenant, commercial leases are different. Many commercial leases are not based on a standard form or agreement, and each individual contract is customized to the needs of the landlord and tenant;
- Negotiability and Flexibility: Commercial lease terms are generally negotiable. Businesses often need special features in their spaces, and landlords are often willing to extend special offers in order to entice tenants to take the space.
- In order to work out an agreement, commercial leases are often subject to more negotiations. Some terms may include the rent amount, rent increases, the length of the lease, the ability to assign a lease, and allowable improvements to the property (including space for advertising and signs); and
- Longer Terms: Most residential leases are generally for a year or less. Many commercial lease agreements, however, are for several years.
Commercial leases are also binding; they are not easily broken or changed, and usually a great deal of money is at stake in the transaction.
What are the Basics of a Commercial Lease?
There are certain basic elements that every lease needs to have in the agreement. These elements include:
- Rent: How much and when the rent is due, and whether there will be increases. If there will be rent increases, you may want to negotiate with the landlord for a cap on the percentage of rent increase;
- Duration: When the lease begins, how long it lasts, when it ends, and how to renew. If you are just starting a business, you may not want to tie yourself to a five or ten year lease if you can help it. If your business grows faster than you expected, or the location does not work out for you, you will want to have a little flexibility in the duration of your lease; and
- Security Deposit: The amount of the security deposit, how and when it is returned, and whether a letter of credit can be used rather than cash.
The lease should also provide for certain practical considerations, including which party is responsible for utilities, insurance, and property taxes. Sometimes, these costs are factored into the rent payment.
What Should the Lease Say About the Commercial Property?
The lease should also include a clear description of the property that is being rented. For example, the lease should clarify whether it includes bathrooms, common areas, a kitchen area, elevators, or a parking area. It should also indicate how the landlord measures the space (since some measurement practices include the thickness of the walls).
You will also want to include information on whether there will be improvements, modifications, or fixtures added to the space. (Often modifications are called “build outs” when a new space is being finished to a tenant’s specifications.) The information on improvements or modifications should also include who will pay for them as well as who will own the improvements after the term of the lease. (Generally, the landlord does, although this can be negotiable depending on the nature of the improvements.)
Does the Commercial Lease Plan For the Future?
You should also check your lease to see if there are provisions that address how the property may be used in the future. For example, it is a good idea to include provisions that discuss:
- Subletting: Whether the property can be used by another, and under what conditions this can happen. Often, this is also referred to as “Assigning a Commercial Lease.”
- Termination or Default: If terminating the lease early is allowed, how is this done and what penalties are involved?
- Dispute Resolution: If there is a dispute over the lease later on, what avenues do the parties have to resolve the dispute? Are they required to go to arbitration, or should they resort to the court system?
- Non-Compete Clauses: These clauses forbid the rental of nearby space to the business’s potential competitors.
What Happens When a Business is Unable to Pay Rent?
As a rule, landlords don’t want to evict tenants. Eviction proceedings are expensive, and notoriously slow to go through the courts. However, every once in a while, you may have a business that is struggling to pay the rent.
If your business is having trouble making rent payments, you may want to talk to your landlord and attempt to renegotiate your rent. You may be able to negotiate a decreased rent payment for a period of time (which may come in handy if your business generates more income during certain months).
If you are a landlord and need to terminate a commercial lease because the tenant business has not paid rent, you will want to check your state’s procedure for evictions. Each state has its own rules regarding how termination notices and eviction papers must be written and delivered, but they generally follow a certain process.
You must give the tenant written notice of the termination of the lease first. Generally, landlords will give the tenant a few days (three to five in most states) to pay the rent or move out. If the tenant does not move (or pay up on the rent), you can then follow the notice by filing a lawsuit to evict.
Do I Need a Lawyer for Assistance with Commercial Lease Issues?
Because commercial leases can be so complex, it is in your best interests to get in touch with an experienced real estate lawyer. If you have questions regarding the terms of the lease, or want to make sure that you avoid any potential problems before they happen, having professional legal help can give you peace of mind.
The right lawyer can help you review your lease and understand each provision. They can also negotiate with the other party help you get the most out of your agreement, protect your interests, and make sure that your commercial lease doesn’t include any unfair or illegal provisions.