Clauses & Terms in Commercial Leases

A commercial lease is a legal agreement between a landlord and a tenant for commercial property rental. Like any contract, a commercial lease contains specific clauses and terms that are important for the landlord and the tenant to understand. 

Some of the most crucial clauses and terms in a commercial lease include the following:

• The term of the lease: This clause specifies the length of time that the tenant will rent the property.
• The rental amount: This clause specifies how much the tenant will pay and any additional fees or charges that may apply.
• The tenant’s use of the property: This clause specifies how the tenant is permitted to use the property and may include restrictions on the type of business (retail, land, special use, etc.) that can be conducted on the premises or the hours of operation.
• The tenant’s responsibilities: This clause outlines the tenant’s responsibilities for maintaining and repairing the property and any other obligations the tenant may have.
• The landlord’s responsibilities: This clause outlines the landlord’s responsibilities for maintaining and repairing the property and any other obligations the landlord may have.
• The right to sublease: This clause specifies whether the tenant is allowed to sublet the property to another party.
• The right to assign the lease: This clause specifies whether the tenant can transfer the lease to another party.
• The right of first refusal: This clause gives the landlord the right to match any offer made by a third party to buy or lease the property before the tenant can accept the offer.
• The option to renew: This clause allows the tenant to extend the lease for an additional period at the end of the original lease term.

It’s important to carefully review and understand all of the clauses and terms in a commercial lease before signing it, as these clauses will dictate the rights and responsibilities of both the landlord and the tenant.

How Commercial Leases Differ from Residential Leases

Commercial and residential leases are similar in many ways, but there are also some crucial differences. 

Some of the key ways in which commercial leases differ from residential leases include the following:

• Commercial leases are typically longer in duration than residential leases. While residential leases are often for one year, commercial leases are often for several years or more.
• Commercial leases typically involve more significant, more complex properties than residential leases. For example, a commercial lease may be for an entire office building or retail space, while a residential lease is typically for an individual apartment or house.
• Commercial leases often involve more negotiation and customization than residential leases. Because commercial properties are used for specific business purposes, the terms of a commercial lease may be tailored to the particular needs of the tenant. In contrast, residential leases are often standardized and may need to be more flexible.
• Commercial leases typically involve higher rental amounts and may include additional fees or charges. For example, because commercial properties are typically larger and more expensive to maintain, the rent for a commercial lease is often higher than that for a residential one. In addition, commercial leases may include additional fees or charges, such as fees for utilities or maintenance, that are not typically included in residential leases.
• Commercial leases may include different types of clauses and provisions than residential leases. For example, a commercial lease may consist of clauses related to the tenant’s use of the property, the right to sublet or assign the lease, and the option to renew the lease. These clauses are not typically found in residential leases.

The key difference between commercial and residential leases is the type of property involved and the specific needs and purposes of the tenant. While residential leases are typically for the rental individual homes or apartments, commercial leases are for renting more significant commercial properties for business purposes.

The Lease Term & Subleasing Potential

The lease term is the length of time that a tenant will rent a property under the terms of a commercial lease. This term is typically specified in the lease agreement and may be for a few months, several years, or more.

The potential for subleasing is the ability of the tenant to rent the property to another party during the lease term. This is typically addressed in the lease agreement, and the landlord may allow the tenant to sublet the property or forbid it.

Suppose the tenant is allowed to sublet the property. In that case, they will typically be responsible for finding a suitable subtenant and ensuring that the subtenant complies with the terms of the lease. The tenant may also be liable for any damages or other problems caused by the subtenant.

If the landlord forbids subleasing, the tenant will not be able to rent the property to another party during the lease term. In this case, the tenant will be responsible for fulfilling all of the obligations of the lease, including paying the rent and maintaining the property.

Rent Abatements & Escalations

Rent abatement and rent escalation are standard clauses that may be included in a commercial lease agreement.

Rent abatement refers to a temporary reduction in the amount of rent that the tenant is required to pay. This reduction may be granted for a specific period, such as during a period of construction or renovation, or it may be given in response to certain conditions, such as if the property is damaged or becomes uninhabitable.

Rent escalation refers to an increase in the amount of rent that the tenant is required to pay. This increase may be based on a predetermined schedule, such as a fixed percentage increase each year, or it may be tied to an external factor, such as the inflation rate or the cost of living index.

Rent abatement and rent escalation clauses are considerations for the landlord and the tenant. For the tenant, these clauses can provide financial relief in certain situations and result in higher rent payments over time. For the landlord, these clauses can help to protect against inflation and other market forces, but they can also make the property less attractive to potential tenants.

Net Lease vs. Gross Lease

In a commercial lease agreement, the type of lease used can significantly impact the rights and responsibilities of both the landlord and the tenant. Two of the most common types of commercial leases are the net lease and the gross lease.

A net lease is a commercial lease in which the tenant is responsible for paying a portion of the property’s operating expenses in addition to the base rent. These expenses may include utilities, property taxes, insurance, and maintenance costs. In a net lease, the landlord is typically only responsible for providing the property and collecting the rent.

On the other hand, a gross lease is a commercial lease in which the landlord is responsible for paying all of the property’s operating expenses in addition to the base rent. In a gross lease, the tenant is only responsible for paying the base rent and does not have to worry about additional costs.

The type of lease that is used can have a significant impact on the financial obligations of both the landlord and the tenant. For example, in a net lease, the tenant has more control over the property’s operating expenses but also has to pay a higher rent. Conversely, in a gross lease, the tenant has a lower rent payment but has less control over the property’s operating expenses.

Space Dimensions & How the Landlord Measures Them

In a commercial lease agreement, the space dimensions are considered by both the landlord and the tenant. The space dimensions refer to the size of the property that is being rented, and they are typically measured in square feet or square meters.

The way the landlord measures the space dimensions can significantly impact the amount of rent the tenant must pay. The landlord may use different methods for measuring the space, such as using the interior dimensions of the property, including any common areas, or using the exterior dimensions of the property, excluding any common areas.

Carefully review how the landlord measures the space dimensions and ensure they are comfortable with the method used. If the tenant needs clarification about the technique used, they can ask the landlord to provide a detailed breakdown of the space dimensions and how they were measured.

The space dimensions and the method used for measuring them are considerations in a commercial lease agreement.

Also Read: How To Properly Define Your Commercial Objectives And Stimulate Your Business

Any “Build-Outs” or Planned Expansions

In a commercial lease agreement, a “build-out” refers to any planned construction or expansion of the property that the landlord will undertake. This may include adding new walls, expanding existing rooms, or installing new fixtures or equipment.

A build-out clause in a commercial lease agreement typically specifies the details of any planned construction or expansion, including the scope of the work, the timeline for completion, and any additional costs for which the tenant may be responsible.

For the tenant, a build-out clause can allow them to customize the property to their specific needs or preferences. This can be particularly useful if the tenant plans to use the property for a particular purpose, such as opening a retail store or setting up an office.

For the landlord, a build-out clause can attract potential tenants by offering the opportunity to tailor the property to their needs. It also provides a chance to increase the property’s value by making improvements or upgrades.

Mediated or Arbitrated Disputes?

In a commercial lease agreement, a dispute resolution clause is a provision that outlines the process for resolving any disputes that may arise between the landlord and the tenant. For example, this clause may specify whether disputes will be mediated or arbitrated or allow for other forms of dispute resolution, such as litigation.

Mediation is a type of dispute resolution in which an independent third party, known as a mediator, helps the landlord and the tenant to reach a mutually agreed-upon solution to their dispute. The mediator does not have the authority to make decisions or impose solutions but rather facilitates communication and negotiation between the parties to help them reach an agreement.

Arbitration, on the other hand, is a type of dispute resolution in which an independent third party, known as an arbitrator, hears the arguments of both the landlord and the tenant and decides to resolve the dispute. The arbitrator’s decision is binding, meaning the landlord and the tenant must accept and abide by it.

The type of dispute resolution used in a commercial lease agreement can significantly impact the landlord and tenant’s rights and responsibilities. Mediation is often less formal and more flexible, but it may only sometimes result in a resolution to the dispute. Arbitration is a more traditional and binding process, but mediation may allow for less negotiation or compromise than mediation.

Overall, it’s essential for both the landlord and the tenant to carefully review and understand the dispute resolution clause in a commercial lease agreement before signing it. This clause will dictate the process for resolving any disputes that may arise, and both parties need to be comfortable with the chosen method of dispute resolution.