A Commercial Lease Agreement is an agreement between a landlord/lessor and tenant/lessee, allowing them to rent property (space) for business.
The landlord permits the tenant to use their premises for a given time, and the tenant compensates the landlord. A commercial Lease Agreement outlines the payment agreements and rules, and obligations of both parties. The payment is usually a monthly fee that varies with the size of property rented since it is given as a cost per square foot.
A commercial lease agreement formalizes the lease and legally binds the relationship between the tenant and the landlord. Different states have different laws that govern commercial leases; an agreement helps ensure that both parties’ rights are protected, and no one exploits the other.
For example, in some states, smoking is prohibited within a given distance from any doorway.
Alternate names of a commercial lease agreement
- Business lease
- Industrial lease
- Office space agreement
- Standard commercial lease
Types of Commercial Lease Agreement
Depending on the needs of a tenant, there are various lease agreements you should consider so as to ensure the lease matches the needs of their business hence more enticing.
Booth (salon or massage) rental agreement
In this type of arrangement, the tenant (business owner) is taken as an independent contractor and pays the base rent monthly, and in addition to that, they are expected to pay a percentage of their total income.
Co-working space agreement
Basically, co-working spaces are shared workplaces/ office spaces for workers from different companies. They are affordable and convenient because tenants share utilities, equipment, and a receptionist, relieving them of these amenities’ costs if they were to pay each their own. An agreement between such tenants and their landlord is a co-working space agreement.
Garage (parking) rental agreement
This is an agreement made between landlords and motorists who wish to have parking space to park their cars while at work. This is mostly seen in densely populated areas such as cities.
Retail lease agreement
Retail property is ideally meant for businesses that rely on a lot of foot traffic like restaurants, shopping malls, grocery stores, etc. They are designed to attract people to make purchases by having large windows that display products in the store. Lease of retail Property can be complicated in cases such as shopping malls, where additional terms would be required as different tenants will occupy the building.
Office lease agreement
This is property used as office space and may be designed to include cubicles, individual offices, conference rooms, and reception areas. In most cases, they are housed within one building and located in the city’s inner parts or outskirts. They can then be classified into classes A, B, and C based on their quality and location.It is the agreement between a landlord and a tenant to set up their office in the lessor’s property for a given period of time.
Industrial Property is used as warehouses, heavy manufacturing, R & D facilities, assemblage, etc. Their value increases depending on how close they are to major transportation routes. They are located outside the city. Lease for this type of property can be complicated considering that the sort of business to run on such property may be at a large-scale level.
Facility event space rental agreement
This is an agreement to rent out a commercial space such as a hall for events such as weddings and corporate events and such. It often lasts for 30 days and has a non-refundable deposit for booking.
A month-to-month lease allows the tenant to occupy a rental space on a month-to-month basis until either the tenant or landlord gives a 30-day notice. It is often used when you want to extend a lease.
This is a type of agreement entered between a tenant who wants to rent out all or a portion of the leased property and the third-party tenant. It is, however, important to declare that the tenant is liable to the terms of the initial agreement, for example, payment of rent every month.
Triple-net (NNN) lease agreement
In this agreement, the tenants are expected, in addition to their monthly rent, to pay for associated real estate taxes, property insurance, and any maintenance costs, which would include common area utilities and property operating costs.
Full service or gross lease
In such a lease agreement, the landlord is expected to have already factored in the operating expenses and real estate expenses which they will be responsible for in the base rent. Should there be further increments of these expenses in the future, the landlord can choose to cater to them or not.
Modified gross lease
It is a fusion of the net and gross lease. It provides room for sharing and negotiation in terms of operating expenses and real estate taxes. The tenant can cover the base rent and common area maintenance (CAM) expenses in one scenario, while the landlord covers property taxes and insurance. In another scenario, the tenant only pays for base rent in the first few months and starts to pay a portion of CAM and insurance later in the course of the lease.
In this type of tenancy, the tenant pays the agreed property base rent and, in addition, a percentage of their gross income for the business operating in the space in question. Percentage lease is common among retail businesses.
Components of a Standard Commercial Lease Agreement
Commercial lease agreements have a wide scope they are meant to cover. This should, however, not frighten you as all it aims to do is protect you from future complications. A commercial lease agreement is used to answer the Who, What, Where, When, Why, and How of a lease.
Here are some of the items that the agreement is used to address:
The leasing period: Outlines from when it is to commence and for how long.
Utilities: State what utilities are within the space and how they are to be paid for, and by whom.
Maintenance: Declares what type of maintenance is required and who is responsible for the expenses.
Renovations: State where, when, and how should improvements or changes be handled and whose responsibility it is.
Purpose: It addresses how space will be used and what type of business the tenant is planning on using it for.
Sustainability: The agreement outlines the environmental laws applicable to businesses that generate hazardous waste or air pollution by machinery through noise and combustibles.
Annual rent increases: States how increases in rent due to market changes are to be handled and who is to cover for that.
Property description: Indicates the qualities of the property in terms of location, available space, number of rooms, and amenities.
Rights: Used to state what tenancy rights apply and how they are to be observed.
Property taxes: applicable real estate taxes are defined, and methods of payment are highlighted. Is the landlord willing to pay the taxes or chooses to share the responsibility or pass the responsibility to the tenant?
Sublease clause: it should the tenant choose to rent out space, the agreement declares how such a case is to be handled.
Landlord: It also referred to as the lessor. He or she is the titleholder of the commercial property being leased.
Tenant/lessee: An individual or corporation paying to use the property being leased.
Term: The length of the period the lease is effective. It could be given terms of months or years.
Demised premise: The actual space being rented. Sometimes demonstrated by a property map showing access to amenities like parking, security, etc.
Real property: The entire property that belongs to the landlord, such as a commercial building or shopping mall and the common areas to be shared by tenants.
Base rent: The amount paid by the tenant for the space being leased. Does not include property taxes and CAM expenses.
Operating costs: These include costs of operating and maintaining the building such as cleaning, security, etc. It also includes property taxes, utilities. They are charged at a flat rate or as a percentage of the tenant’s footprint.
Security deposit: Money paid to the landlord before occupancy as a gesture of good faith and the tenant’s commitment to the lease.
Property use and occupancy details: Guidelines and regulations regarding that should be observed during the lease term, such as dumping and smoking regulations.
Improvements: If the tenant intends to make modifications to space, it should be highlighted in the agreement and should show who is expected to cater for costs.
Laws and regulations: It states whether the building complies with applicable local, state, and federal laws such as the Americans with Disabilities Act.
The agreement can include more than is mentioned above, depending on the concerns raised while coming up with the agreement. Do not limit your agreement to the list provided; try to ensure there are no doubts regarding the lease.
Required Legal Clauses
To ensure a commercial lease is well within the law, there are clauses that must be addressed in the agreement. They are meant to accommodate the rights of the general public, people with special needs, as well as the people expected to be operating within the premises.
The American’s with Disability Act (42 U.S. Code § 12183)
Also referred to as the “ADA’ states that any commercial tenant offering public accommodation including but not limited to restaurant, retail stores, office buildings, shopping centers, etc. or have more than 15 staff members should provide accommodation and access to persons with disabilities equal to that provided for the general population. However, this applies to buildings renovated or built after 1992. The landlord and the tenant are obligated by law to ensure that this is realized, so the agreement should state how and who is to cater to the costs if the building does not meet the ADA standards.
Hazard Waste (42 U.S. Code § 6901)
It is used to ensure that the tenant is aware and will adhere to any local, state, or federal laws in matters regarding the disposal of hazardous waste. For tenants who are in the manufacturing, medical, pharmaceutical industries, it is imperative that this is observed due to the amounts of toxic waste generated by such industries. It ensures the acceptable environmental standards; (air, soil, and water) are met within the premises. Both parties are liable according to the law if the agreement does not address this.
A commercial lease agreement should adhere to consumer protection laws. Tenants are consumers according to the law, and they are entitled to various rights as consumers. As consumers of your product(space), tenants will always look out for the rights; they are entitled to as a consumer to prevent unfair, deceptive, and fraudulent agreements such as exploitative prices. As a result, it is imperative to familiarize yourself with the consumer protection laws in real estate as these laws promote fairness within the leasing business.
They include basic rights such as :
Default: This clause is used to highlight the consequences of either party defaulting on the agreed obligations. For instance, should the tenant fail to pay rent, which is common in leasing. The consequences are usually in monetary terms.
Exclusive rights: This is prevalent in leases involving multiple tenants, such as malls where a tenant requests to be granted “exclusive rights,” which prevents the landlord from renting out space to another tenant in the first tenant’s line of business. For example, a supermarket owner requests “exclusive rights” to be the only supermarket in a shopping mall.
Option to purchase: This is a clause that permits a tenant to purchase space after a given period. The terms could be pre-determined. The price could also be negotiated if at all the tenants notifies the landlord of their intent.
Option to terminate: This offers both parties an opportunity to terminate should the need arise in the future. It is so often set a huge amount which would only be sensible under extreme circumstances. For example, it comes into play when you intend to sell the building. You should set a price that would allow you to pay the tenants for the inconvenience.
HVAC: This represents the Heating, Ventilation, and Air Conditioning of a building. The costs of operating and maintaining these systems can either be on the tenant or the landlord. This clause outlines who is responsible for the costs incurred so a tenant can have the HVAC system condition inspected to ensure they are operational.
Right of first refusal: It is used to give the tenant the option of purchasing rather than renting should they consider it more beneficial to purchase. Upon purchase, rent is withdrawn, and only other costs such as a mortgage, if they used a loan, are applicable.
Renewal periods: Renewal periods are useful as they permit negotiations for pre-determined rental rates should a tenant choose to renew after the given period. This means a company can make long-term plans without having to worry about relocation.
Sublet/assignment: In some cases, due to unprecedented events, a tenant may choose to rent out their space. This clause provides guidelines on how this should be handled.
Authorization/signing: This is a provision for the notary public to sign as a witness of the agreement. Their presence makes the agreement legally binding.
How to Write Commercial Lease Aggrement
Now that you are aware of what to include in a commercial lease agreement, here are the steps that you should follow when writing to ensure that your agreement is in order:
The first thing is to write the agreement declaration, which is characterized by stating the date when the agreement was reached, indicating the lessor and the lessee in full names.
Description of leased premises
The declration is then followed by a description of the leased area in terms of available space, type of space ( e.i if it is a store, warehouse, etc.), its location (by street address), and any other additional description such as available amenity.
Use of leased premises
The purpose which the tenant intends to use the space should be declared whether it is an office, manufacturing, etc.
Term of lease
After outlining the lease’s purpose, you can then specify the length of the term by stating the exact date number of months, weeks, or years the tenant is expected to occupy the space and state the tenancy’s start and termination date and the agreement all the same.
The next thing is to declare the amount of money the lessee is expected to pay for space without additional costs or consideration. Ensure to include the date when payments are due every month.
Option to renew
This is then followed by making a provision for a renewal of the lease. It should highlight two scenarios; one where the tenant cannot renew and where they can. Details about the renewal, such as will the base rent remain the same or how much will the increase be, should be indicated.
Follow this up by indicating expected expenses expected and how and who should cover them. If the lessee is to pay just the base rent, indicate it by defining it as a gross expenses lease. If both are to be involved in paying additional expenses such as maintenance and insurance, it should be indicated by defining it as a modified gross lease. Ensure that you list the breakdown of the expenses. If they are to have a triple net (NNN) lease, where both parties share responsibilities such as insurance, it should be indicated in and how much is expected for which expense.
In a case where you expect the tenant to pay a security deposit, indicate and state that it is refundable pending the successful fulfillment of the agreement by the time the agreement will be ending.
Any modifications made to the property at the lessee’s request should be outlined, and where they are to be paid for by the lessor, it should be declared.
Default and possession
Next is the declaration of late payments are to be handled. The number of days the lessee is allowed to delay payment is indicated, and any non-payment penalties are expected should the lessee fail to pay after the additional days(default period). If the penalty is a percentage of the annual payments or a flat fee, it should be declared. Note that it can only be either.
Terms imposed by authorities such as the municipal council concerning aspects such as advertising should be declared and how to approach such matters stated.
The property’s physical location should be outlined to show that the lease agreement is subjected to that locality’s state laws.
The lessee and the lessor can provide addresses or contact information where notices, payments, requests, or other formal communication should be sent.
For the agreement to be binding, both parties must include their signature in the presence of a notary public. For a business entity, the representative legally responsible for binding the business to agreements should sign. The date when it was signed should be indicated.
The notary public who was present when the lessor was signing should then acknowledge that the agreement is true and correct and attest to this. The notary public indicates the date and their name.
Other lease terms
Should there be other terms that are needed for the agreement to be satisfactory, you can include them at this point.
Signing of the Commercial Lease
A signature is used to officiate an agreement by declaring that the signatory is aware of the agreement’s contents and agrees to it.
Here are the ways you can sign a commercial lease agreement:
This is done when the landowner and the tenant arrange to meet in person and sign the copies of the lease agreement so that each can go with an original. For such a case, it is recommended to involve a third party who has no allegiance to either side as a witness. When these conditions are fulfilled, the agreement is now legally binding.
This is based on the Electronic Signatures in Global and National Commerce Act (Public Law 106-229), which was effected from June 20, 2000, in the U.S., which allowed two parties to enter into a contract online. There are various service providers such as EverSign, HelloSign, and DocuSign that provide this service at a fee after a five-document free trial. Therefore, electronic signing can be used for a commercial lease agreement, and it would still be legal.
This is a signing done in the presence of a notary public. Both parties provide I.D.s to verify they are whom they say they are, and the agreement is notarized. It is the most recommended method of signing such an agreement.
Free Lease Agreement Templates
Here we are having a collection of Commercial Lease Aggrement Templates that you can download for your project easily and quickly.
Templates by State
Steps to Lease Commercial Property
Now that you are familiar with the different lease options and have settled on the best approach for you, you can set the basics of leasing your property.
You can do this in the following steps:
Step 1: Measure space available
Space is the first thing you want to determine. This is done by actual measurement of the length and width of the useable indoor space as this is where the tenant is to occupy.
Step 2: Set the price per square foot ($/sf.)
The next step is allocating the price you are to charge per unit area of the space available. This is usually given in price per square foot ($/S.F.). Try to set the price relative to that being charged by other landlords in your area; however, factor in costs, market demand, industry standards, interest rates, etc.
Calculating price per square foot;
It is important to note that this price is determined by the indoors area that the tenant can make use of for their business operation. It is calculated by dividing the annual rent($) by the total square footage(S.F.) of the demised premise. It is presented as a price per square foot ($/S.F.).
This is how it can be presented in different formats:
Step 3: Lease type: gross or triple-net (NNN)
Any property is subject to maintenance, insurance, real estate taxes, etc. Ensure that you highlight how these will be handled. Let the tenant know whether it is a gross or triple (NNN) lease. In a gross lease, these expenses are covered by the landlord, and in a triple (NNN) lease, it is the tenant who pays for them.
Step 4: Hire an agent or market the property yourself
The next step is getting your property listed. It lets interested parties know the availability of your property. You can decide to do it by yourself or hire a real estate agent. The customary charges are 4-6% of the total lease amount paid in two installments, the first 50% once the lease has been agreed upon and the other 50% once the tenant has occupied the space. For example, for a 2-year lease of $1000 per month rent and a 5% fee charged, the agent fee will be 5% of $2400 which is $1200.
Step 5: List the property
Real estate agents customarily do this for you and have ways to execute it, such as websites and blogs; however, if you intend to market the property yourself, you can market it online by posting on Facebook, Whatsapp, or other social networks. To entice more clientele, use appealing images showcasing the interior, exterior, and common areas. Include any information that might be relevant to the client, such as location, contact information, and amenities.
Step 6: Negotiating the lease
Once the tenants begin to reach out, try and understand their needs and compare them to that which you are offering to reach an agreement. You can involve your agent during negation to come up with creative ways of sweetening the deal while still charging a profitable rate. When negotiating, ensure that you know the market conditions (demand and supply) and other factors that affect your property’s likeability; focus on the positives.
- Pull Property Data
Property data include vehicle traffic and demographics that would be of interest to a tenant who depends on such traffic to run their business. You can obtain this information from state sources such as the department of vehicles or census reports.
- Good Credit History
Tenants with a good credit history or who run a business with multiple locations are more desirable.This provides you with a bit more reassurance and shows the tenant’s financial ability. Companies with better credit ratings also increase the value of the property should they ever decide to sell; therefore, as a landlord, in such a case, a credit tenant will be more enticing than a new business. Should the business have a poor rating, you can ask the tenant to lease as a personal guarantor so that should they default on the payment, you can confiscate the tenant’s assets as compensation.
- Prepayment of Rent
Some tenants can choose to pay a couple of months’ rent in advance. Tenants who make such an offer are desirable as it is a sign of commitment that removes the uncertainty of payment for that period.
Step 7: Conduct a credit check (business + individual)
It involves carrying out background and credit checks. This is especially when dealing with small and new businesses. You can use the Experian website to do your research.
To perform a Business Credit Check (Experian), set your objective to determine the company’s credit history and information, such as how fast they settle their bills with vendors and their annual sales. It will cost you around $39.95-$49.95, depending on the plan you select. The company is given a score between 0-100; a value above 80 is preferred.
When you are to perform an Individual Credit Check (Experian), your objective is to determine the business owner’s creditworthiness. You can determine their income and other financial liabilities. This is especially important if they are to guarantee the business personally.
Step 8: Approve or disapprove the tenant
After you have determined all that is needed, it is your decision to approve or reject a tenant, depending on your evaluation. Should your decision be to reject, you should notify the tenant through a tenant refection letter. If the business was not creditworthy, but the owner was, you can opt, in agreement with the tenant, for them to sign a personal guaranty binding the tenant to the lease.
Step 9: Determine the security deposit
Security deposit can be defined as the amount of money paid in advance as security against the lease’s non-performance of the agreement obligation. In commercial real estate, unlike in residential, there is no limit on how much you can ask for as security deposit; however, ordinarily, it is between 2-3 months’ rent.
Step 10: Write the commercial lease agreement
Once the above has been agreed upon, it is now time to draft the lease agreement. You can write it yourself provided you have all the necessary information. However, an attorney would be best suited. Once the lease agreement is ready, both parties should sign in the presence of a notary public as a witness. This way, the agreement can hold in court.
Step 11: Taking occupancy
After the security deposit has cleared, the tenant can take occupancy and use it as outlined in the lease. The commercial lease is effective till the end of the term unless any alterations are made.
Termination of a Commercial Lease
Sometimes, the worst can come to worst, and a landowner may choose to terminate the lease agreement. The most common reasons for termination of commercial leases are;
Should the landlord at one point wish to terminate the lease, a “buy-out” is usually offered. However, the tenant’s business’s success can influence their decision to accept or reject the offer. A “buy-out” can be a lot of money, and it will definitely affect the termination.
Frequently Asked Questions
What exactly is the difference between the “real property” and the “demised premises”?
Real property is the entire property under the ownership of a landlord where demised premises are the subsets/stalls/stores/offices within a building/real property.
Difference between Commercial Lease Agreement Template and Commercial Rental Application
A commercial Lease Agreement template is a guide that contains the general inclusions of how a commercial lease agreement should be written, where else a Commercial Rental Application is a form used to evaluate potential tenants of their suitability to rent a space in terms of credit and any other relevant information about the tenant.
A commercial lease agreement is essential to both the lessor and the lessee when leasing. It is a legal document that protects both parties. Where else you can draft one yourself, the use of an attorney is advised to ensure that you capture all the relevant information required.
A commercial lease agreement can vary from one lease to another; however, there are basic components found in a standard commercial lease agreement. They add landlord, tenant, term, demised premise, real property, base rent, operating costs, security deposit, property, and occupancy details and improvements.
Ensure to capture all these elements in your agreement. Before renting out space, try to ensure that it meets the local, state, and federal laws such as ADA. As demanding as it is, it is very necessary, and you should not brush it off. There is room for negotiation when leasing; therefore, one should not hesitate to make proposals.