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Commercial Lease Agreement Overview

A commercial lease is a contract between a landlord and a business for the rental of property. Most businesses will choose to rent property instead of buying it because it requires less capital. Commercial lease agreements are more complicated than residential leases because the terms are negotiable and vary greatly from lease to lease. Before signing a commercial lease, it is important to understand the lease terms that define the rights and responsibilities of each party.

Commercial Lease Agreements vs. Residential Lease Agreements

There are significant differences between a commercial lease agreement and a residential lease. Commercial leases offer:

  • Fewer legal protections: Consumer laws that apply to residential lease agreements do not cover commercial leases. State laws provide less consumer protection against deceitful landlord practices because state lawmakers assume that business people are more knowledgeable.
  • Varied terms: In many cases, a landlord can use a standard form for residential leases because there is little need to accommodate different tenant requirements. Commercial leases, though, vary because the need of each tenant is different.
  • Negotiable terms: Commercial lease terms are usually negotiable. Terms subject to change include the rent amount, rent increases, the length of the lease, the ability to assign a lease, and allowable improvements.
  • Longer terms: Most residential leases are for no longer than a year. Many commercial lease agreements, on the other hand, are often for several years.

Important Commercial Lease Agreement Terms

Before signing a commercial lease agreement, make sure that the terms will meet the needs of the business. The failure to determine requirements prior to committing to a lease can lead to unfortunate consequences. Commercial leases usually include the following terms:

  • Rent amount: A landlord will calculate the rent amount based on the square footage of the space. Be aware of what footage the landlord uses to calculate the rent. For example, does the footage include the elevator and interior walls? If possible, negotiate which party is responsible for other costs like utilities, property taxes, insurance, and repairs.
  • Rent increases: Commercial lease agreements will usually provide for an annual percentage-based rent increase. Negotiate with the landlord for a cap on the percentage increase in order to avoid unmanageable rental costs later.
  • Security deposit: The lease should verify the amount of the security deposit and the terms regarding its return.
  • Length of the lease: Most landlords prefer long-term lease agreements. This, however, may be unwise for a new business. Ask the landlord for a short-term lease with an option to renew. This may raise the rent amount, but it is a better alternative than agreeing to a lengthy term.
  • Improvements: A lease should address what improvements or modifications can be made to the property, which party will pay for the improvements, and whether the tenant is responsible for returning the unit to its original condition at the end of the tenancy.
  • Description of the property: The lease should clearly describe the property under lease. For instance, the lease should clarify whether it includes bathrooms, common areas, a kitchen area, and a parking facility.
  • Signs: If necessary to the success of the business, be certain that the lease agreement does not prohibit putting up signs that are visible from the street. Also, check local zoning ordinances to determine what other limitations may apply.
  • Use clause: Many lease agreements will incorporate a use clause to define the activity the tenant can engage in on the premises. These clauses are in place to protect the property from damage and limit the liability of the property owner. If possible, ask for a broad usage clause just in case the business expands into other activities.
  • Exclusivity clause: This is an important clause for retail businesses renting space in a commercial complex. An exclusivity clause will prevent a landlord from renting space to a competitor.
  • Assigning and subletting: Ask the landlord for the right to assign the lease or sublet the space to another tenant. This is an important term because the tenant is still responsible for paying the rent if the business fails or relocates, but with a assignment or sublet clause in place, the business can find someone else to cover the rent.
  • Compliance with the Americans with Disabilities Act: Under the act, if a business is open to the public and has more than 15 employees, the premises must be accessible to people with disabilities. The lease should determine who is responsible for making any necessary alterations to the property and who must pay for these changes.
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