Commercial Lease Agreements: An Introduction
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Commercial lease agreements are used for leasing commercial property such as a store, restaurant, shopping center, or office building. When buying, selling or leasing commercial property, it is important to work with a commercial real estate broker who can help you locate the right space for your needs. A commercial lease broker is an expert in the commercial lease rental market as well as the commercial sales market. The commercial lease broker can also assist clients with a commercial sublet. The seller generally pays the commercial real estate broker’s commission. Commercial brokers must be licensed by the appropriate governing agency of the state in which they work.
Letter of Intent (LOI)
A LOI is used before the parties sign a formal commercial lease agreement. LOI’s can be negotiated through the commercial lease broker or a real estate attorney. This is where most misunderstandings start if the parties’ intentions are not set forth clearly in the LOI. The LOI usually is an unenforceable and non-binding document that lists the deal points, which are then formally put into a commercial lease contract. When negotiating a LOI, it is important to clearly state in the LOI if you intend it to be a binding legal contract or non-binding. See Letters of Intent in Commercial Leases for more information.
Binding Commercial Lease Contract Provisions
The following are typical binding commercial lease contract provisions:
- The Parties Names and Contact Provisions
- Address of the Lease Premises
- Lease Term
- Lease Amount
- Security Deposits
- Property Use
- Duty to Repair
- Tenant Improvements
- CAM Charges (common area charges)
- Time to Cure
- Notice Provision
- Dispute Resolution Methods
Different Types of Commercial Leases
- Gross lease: The tenant pays a fixed rent. The landlord is responsible for paying the taxes, insurance and maintenance and repairs.
- Net lease: The tenant pays the rent plus a portion of the common area maintenance charges (CAM), insurance and other operating expenses.
- Triple-net lease: Typically used for a freestanding building such as restaurant. The tenant pays for all fees and operating expenses associated with the space.
- Shopping center leases: The tenant pays a base rate in conjunction with their square footage, and some CAM charges, as well as a percentage of their gross sales. The tenant may also be assessed a portion of the property taxes. Shopping center leases also have restrictions pertaining to signs, hours of operation and deliveries. It is also common in shopping center leases for the landlord to retain the right to be able to relocate the tenant.
- Land or ground lease: The tenant leases the ground and builds a structure on the property. At the end of the lease term, the improvements on the property, including any building or buildings, will revert back to the landowner.
Learn more about Commercial Lease Terms.
A commercial sublet occurs when the tenant subleases all or a portion of their space to another tenant with the landlord’s permission. Even if you have vacated the premises, you are still financially responsible under the terms of the original lease. Be sure to carefully select a commercial sublet tenant that is financially responsible.
When entering into commercial lease agreements, you should consult with a real estate lawyer first. Typically the real estate broker brings the parties together, and the real estate lawyer negotiates the binding provisions of the formal commercial lease contract. Commercial lease agreements and/or commercial sublets can be complicated. There is no standard commercial lease forms that are used for commercial leases, so it is recommended that you use a real estate lawyer to draft your commercial lease contract. Also, if you have a landlord/tenant dispute that arises in connection with a commercial lease contract, you should consult with a real estate lawyer.