Building Lease: Types and How They Work

What is a Building Lease?

A building lease is a legal contract used by landlords and tenants to formally agree on the rental terms of commercial buildings that are used for office, industrial, or retail purposes. They are also used for commercial properties like warehouses, restaurants, and medical facilities. Landlords receive payments from their tenants in return for being able to use the commercial property for their business as needed.

A building lease differs from a residential real estate lease because the tenant is expected to use the property solely for business operations instead of everyday living. The space a business uses for their daily tasks is referred to as ‘demised premises’ because it is not a whole real property but is actually space within real property.

A building lease is known to be referred to as other names including:

• Business lease
• Industrial lease
• Office space lease
• Commercial lease

How Building Leases Work

Building leases work by allowing an individual or company with a legitimate business to rent building space. These leases result in agreements for the tenant to use the property for approximately 3-5 years as long as the rent payments are made on time and in the full amounts agreed upon. However, the number of years in the lease terms varies and can be shorter or longer depending on the agreement between the landlord and tenant. A building lease can be renewed if desired once it ends as long as both parties agree on the new rate and renewal terms being offered by the landlord.

Businesses that you may see most days such as restaurants, factories, self-storage facilities, office buildings in the city, small shops, and shopping centers likely do not own the property they conduct business out of. Instead, they chose to become a party to a commercial lease because it can be cheaper for them then outright purchasing a building, they offer flexibility, the ability to relocate when needed, and not wanting to tie up capital in real estate.

Choosing a commercial lease for your business will allow you to discuss options with your landlord as far as the term of the contract, amount and due dates of payments, and individual responsibilities. This type of lease is good for a business owner who may not want to get stuck in a particular area before testing the success of their services. A tenant may not wish to stay in the same location for very long and a building lease offers flexibility.

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Common Types of Commercial Leases

The most common types of commercial leases are listed below with descriptions:

• Full Service/Gross Lease: A full service, or gross, lease provides that operating expenses, insurance, maintenance costs, and real estate taxes are included in the base rent, so no extra payments are needed from the tenant. The landlord does have the right to require the tenant to pay additional fees and dues if there are increases in the future though, but this would need to be expressed in an understandable way.
• Net Lease: A net lease is the opposite of a full-service lease because no operating expenses, taxes, insurance, or maintenance fees are included in the base rent, so the tenant is sometimes obligated to pay all of them separately.
• Single Net Lease: The tenant pays for just the real estate taxes outside of the base rent.
• Double Net Lease: The tenant pays for just the property taxes and insurance outside of the base rent.
• Triple Net Lease: In a triple net lease, a tenant pays for real estate taxes, property insurance, and area maintenance (known as CAM).
• Modified Gross Lease: A modified gross lease is a mixture of the full service and net lease principles. A tenant who is part of this type of lease shares responsibilities of paying operating or other fees with the landlord, which may include property taxes, common area maintenance, property taxes, structure repairs, and utilities.. The tenant and landlord come to an agreement on who will pay for what and have the opportunity to negotiate if there is a dispute that arises.
• Percentage Lease: A percentage lease requires a tenant to pay a percentage of their gross business proceeds at the end of each month in addition to the base rent. Usually, the tenant doesn’t have to pay a percentage of their gross business proceeds until the monthly sales go above a specified amount. This may not be a great option for business tenants who do not want to share their earnings.

To read more about the types of commercial leases that exist, visit this website.

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Key Content to Include in a Building Lease

For a building lease to be qualified as such, it should contain the following content at a minimum:

1. Parties. The identities of the landlord and tenant should be stated near the beginning of the building lease. The roles of each party should be listed near their names. It is possible the business names relating to the tenant and the landlord, if it applies, should be included too.
2. Duration. The number of years, months, weeks and/or days that the lease will be good for should be clearly expressed to avoid confusion. The anticipated start and end dates should be listed. This section should also state whether there will be an automatic renewal if the tenant does not inform the landlord within a specific time period prior to the end of the current lease that they will be moving their business elsewhere.

It needs to be stated whether there are exceptions to the end date or an early termination allowance and what situations will permit or lead to them.

1. Demised Premise. This section needs to describe the rental space being rented to the tenant in detail. Since this lease is for a business property, the document needs to state what other features are available to the tenant such as parking lots, snow removal, security services, janitor help, and temperature control.
2. Real Property. A description of the real property that the demised premise is in needs to be mentioned and all common areas should be discussed.
3. Base Rent & Deposit. The amount of rent to be paid to the landlord must be included in this building lease as well as the frequency of these payments. The amount of the security deposit to be made by the tenant has to be in the contract along with when it is due and whether it can be returned at the end of the lease.
4. Operating Costs. This section will cover what costs in addition to the base rent the tenant is required to pay to the landlord and how often. How and where the tenant needs to make the payments should be included also.
5. Property Use and Occupancy. This part of the document will go through what is and is not allowed to happen on the property premises. It will describe who is expected to occupy the rented space and what basic business operations will take place there.
6. Improvements. In any scenario the property being used for business may end up needing improvements that are costly, especially if operations involve consistent cooking or other messy tasks. This section should state which party will pay for the improvements and if their financial responsibility will be capped at a certain amount.

How Are Building Lease Payments Calculated?

Building lease payments are calculated by setting a price for each square foot ($/SF) and multiplying that amount by the amount of square feet that exist in the rental space. The price can be high or low depending on what buildings in your area are charging, because landlords want to stay on board with the commercial property market.

Calculations are not always the same because sometimes property insurance, maintenance costs, and tax dues are included in the price and other times they are not. There may also be miscellaneous things included or excluded based on the area of the rental as well as the type of lease.

Get Help with a Commercial Lease Agreement

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