Commercial Space Lease Agreement: A General Guide
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A commercial space lease agreement refers to a contract for any kind of business to rent office spaces or other business properties from a landlord in the U.S. The term 'commercial' means that the particular lease is for different business activities rather than housing. A commercial tenant can be either a sole proprietor who has a small business or someone who runs a major multinational corporation. Meanwhile, let us learn more about a commercial space lease agreement in detail below.
Types of Commercial Space Lease Agreements
The commercial space lease agreement should state the type of lease and the basis on which one calculates rent. These are usually standard arrangements but are subject to negotiation. Meanwhile, here are the common types of commercial space lease agreements:
- Net Lease Agreement: In this kind of commercial space lease agreement, the related tenant pays all or part of taxes, insurance, or maintenance costs. These would otherwise be incurred by the specific landlord apart from the stated rent.
- Double Net Lease Agreement: In this kind of agreement, the tenant pays taxes, insurance, and rent.
- Triple Net Lease Agreement: This commercial space lease agreement requires the tenant to pay taxes, maintenance, insurance, and rent.
- Percentage Lease Agreement: The rent associated with this particular agreement is based on a specified percentage of the tenant's sales and profits.
- Fully-serviced Lease Agreement: The rent includes utilities and other services that the tenant would pay for separately. This kind of lease is common in office buildings with several tenants.
Knowledge Tip: You can also download this template for your reference.
Important Terms in a Commercial Space Lease Agreement
Several items are commonly included in a commercial space lease agreement. They only apply if they are included in the commercial space lease negotiations with the landlord. Here are some basic terms with their associated questions:
- Lease Term: How long is the particular lease? Will it ever end on a fixed date, or is it always subject to different conditions? Does either the tenant or landlord have an option to extend it or cancel early?
- Rent: How much is the base rent of the particular commercial property? Does it increase during the set periods? What other extra charges are included in addition to the rent?
- Other Costs: Who pays for all the items? Who is in charge of the specific building insurance, property taxes, and other kinds of routine maintenance?
- Security Deposit: How much is the particular deposit, and when may the property’s landlord withhold it?
- Permitted Use: Is this particular lease only for specified commercial activities? If so, the tenant may also not engage in other business activities without the permission of the property’s landlord.
- Exclusive Use: Does the tenant always get the exclusive rights to perform certain activities? This happens within a larger property with many tenants.
Knowledge Tip: Need an answer to these questions? Check this video.
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Commercial Space Lease Agreement Vs. Residential Lease Agreement
There are several differences between a commercial space lease agreement and a residential lease agreement. These include the following:
| Particulars | Differences |
| Including Varied Terms | Landlords always use lease agreement templates for all kinds of residential leases because there are fewer tenant requirements. Commercial space lease agreements, on the other hand, have varied terms because every tenant’s requirement is different. |
| Adding Negotiable Terms | Commercial space lease terms are negotiable in most cases. Terms subject to such a change include the rent amount, the associated rent increases, the length of the specific lease, the ability to assign a lease, and all the other allowable improvements. |
| Working with Longer Terms | Most residential leases remain for a maximum of a year in the United States. Whereas commercial space lease agreements are functional for several years. |
Things to Keep in Mind When Signing a Commercial Space Lease Agreement
Although commercial space lease agreement tenants have fewer legal protections on the theory that they are more business-savvy as compared to other residential tenants. So, what is the solution here? Lessors and lessees of such lease agreements need to address other factors in their commercial space lease, which include:
| Particulars | Things To Keep in Mind |
| Including Pass-through Costs | A commercial space lease agreement always allows the property owner to pass through the costs. These may be related to operating or even leasing out the building to other renters. Pass-through costs may include different utilities, common area maintenance, and all kinds of property taxes. Pass-through costs may assist during rent negotiations. Yet, all business owners must look for them in the commercial space lease agreement. |
| Taking Leased Premises Measurement | The respective tenant's obligations for rent and maintenance always depend on the square footage of the associated premises. Legal issues often begin when the commercial space lease agreement is unclear. The confusion is usually about where those measurements begin. Tenants may often believe the premises consist of the interior of the respective building. Yet, a few landlords measure the outdoors instead. |
| Doing Improvements and Alterations | The commercial space lease agreement must always clarify who is responsible for the initial build-out. The same person must also look after the load-in following the opening of the particular business. Things should be made clear in the agreement if the landlord must provide any materials or have the property in a particular condition before the future tenant moves in. The specific agreement must also clarify who handles any future maintenance or alterations. |
| Handling Natural Disasters and Eminent Domains | Almost no place in the United States or any other part of the world is safe from any kind of disaster. The landlord and tenant may have their respective insurance. But what if the building is a loss or needs extensive repairs? These insurance policies may not be enough for both parties. The particular commercial space lease agreement must address what happens if the building needs renovations or in situations when the tenant must vacate it. |
Key Terms for Commercial Space Lease Agreements
- Lessor: A landlord who legally owns all the assets of a particular property. They lease a specific property or asset by giving the tenant the right to occupy or use it for a particular period.
- Lessie: A tenant who pays rent to occupy a specific space or property for a particular period. They may be a legal entity, individual, or a company.
- Term Sheet: An offer to lease that is usually used to guide the drafting of a contract and is commonly used during negotiations. It further outlines the commercial space lease agreement’s terms and conditions in bullet points.
- Base Rent: The set amount that a particular lessee pays to the lessor each month. The payment is made to occupy the associated premise or use the particular asset.
Final Thoughts on Commercial Space Lease Agreements
Every lessee needs to have a thorough understanding of commercial space lease agreements, whether they are signing their first lease or getting ready for a move or a renewal. Unlike residential leases or other documents, commercial space lease agreements are very much "buyer beware." The rights of the lessor or the lessee are exactly as stated in the particular lease, with little to no other protections. That is why both parties must approach a professional lawyer with expertise in drafting a legal, commercial space lease agreement.
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