Components of leases for commercial property
Leases exist to form a legal agreement between a landlord and a tenant regarding who will pay various expenses and the rules related to renting that property. Because commercial properties are used differently than residences, commercial leases tend to have more components that are specific to each tenant. While there is no standard format for a commercial lease, most cover the following elements in order to provide clear guidelines for both you and the landlord:
- Leases can be short-term or long-term, ranging from a few months to several years. Regardless of length, your lease should be specific about when you will begin your rental and when it will end.
- A commercial lease will specify how much rent costs over a period of time and what other expenses are included in the rent price. Some landlords include insurance and taxes in the rent of a commercial lease, while others do not.
- If the space you are renting needs repairs, your lease should have a section explaining who is responsible for each repair.
- Your commercial lease should include a section clarifying who is responsible for paying for future repairs or building maintenance.
- Including business protections such as agreements about subleasing or conditions for default on your commercial lease can help protect your business.
- Many leases have a section that contains different options for renewing the lease after a certain length of time. Renewal terms can usually be renegotiated but can be a good guideline for making long term plans.
Types of commercial leases
There are several types of leases that an entrepreneur might consider when looking for a rental space. The category of a lease depends on how the landlord determines the cost of rent and who pays for each of the property’s expenses. Understanding the terminology for the different types of leases can help you decide on terms that work for your business. Common lease types include:
- Single net: In a single net lease, the tenant pays for rent and property taxes.
- Double net: In a double net lease, the tenant pays for rent, insurance and property taxes.
- Triple net: In a triple net lease, the tenant pays for rent, insurance, property taxes and property maintenance costs.
- Full-service: Also known as a gross lease, a full-service lease occurs when the tenant is only responsible for rent and the landlord covers all other costs associated with the space. This is the most common type of commercial lease and the one that provides the most protections to tenants.
- Percentage: In a percentage lease, the tenant pays a pre-determined amount of base rent each month and a percentage of their monthly sales from that property. Percentage leases are most commonly used in retail spaces.
Steps in evaluating a commercial building lease
Once you have explored different options for leasing a space for your business, carefully evaluate the terms of each lease and how they would support or hurt your success. Follow these steps when evaluating a commercial building lease before making a final decision:
- Understand your needs
- Research the market
- Form a leasing team
- Consider the long term
Understand your needs
It is important to understand the needs of your business when reviewing a lease. Consider your financial resources as well as the amount of space you will need initially and your plans for growth. A commercial lease can have a large impact on a business, so it is important for entrepreneurs to fully understand the long term cost.
Research the market
Compare the rate you are offered to other similar properties in the area. Although you may not be able to know the specific terms of each other space, browse real estate postings to get an idea of a fair rate.
Get the best deal on a lease by consulting lawyers, real estate brokers and accountants on the details of each lease. Many experienced professionals offer their services to negotiate the terms of a lease on your behalf, allowing you to invest in a better long-term deal.
Related: How to Hire a Leasing Agent
Tips for negotiating a lease
After you have a good idea of how much your ideal property would cost, begin negotiating the specific terms of various leases. Negotiating with a landlord to create a lease agreement that will serve your short and long term financial goals can be a deciding factor in your business’s success. Here are a few tips for negotiating a lease for a commercial property:
- Landlords can hide fees in complex legal jargon, so it is in your best interest to confirm what each clause means.
- Understanding real estate terms can help you advocate for the best deal.
- If a landlord is firm on rent price, you can negotiate for additional value by asking for benefits such as an allowance for renovations.
Commercial property FAQs
Here are a few answers to commonly asked questions about commercial property:
What is commercial property maintenance?
Commercial property maintenance includes landscaping, waste management, cleaning and the upkeep of important systems such as plumbing and electric service.
Where can I find commercial properties?
Find listings for available commercial properties on websites or in newspapers. Many landlords will advertise a space by putting signs up on the building itself.
What can a commercial property be used for?
Commercial properties can be used for any business activities including retail and office work.