What is a Commercial Lease and How Does it Work?
If you own a business, there’s a good chance you need a physical location. Whether you operate a retail storefront, restaurant space, medical or dental practice, or warehouse – you’ll have to understand what a commercial lease is and how it works.
And that’s where things get complicated.
There are multiple types of commercial leases, and they’re all dense with details. For example, can you renovate to add a coffee bar? Do you know who pays the taxes? What happens if a window breaks?
That might not sound like exciting stuff, but it’s crucial to understand what you’re getting into before signing a lease. Otherwise, you could end up with a contract that doesn’t protect your rights.
This guide covers the basics of commercial leasing, including different types of leases and common questions new tenants have.
What’s in a commercial lease?
A commercial lease is a contract between a commercial tenant and a property owner that gives the tenant the right to occupy a space. Your lease will generally outline the rental amount, duration of the lease, and security deposit.
The document also details the rights and responsibilities each party takes on regarding the property. You’ve likely signed a residential lease to rent an apartment, and that might make you think commercial leases are no big deal.
Spoiler: They are a big deal.
Commercial leases cover a lot more than residential leases, and you can land in hot water if you don’t understand your responsibilities.
Different Types of Commercial Leases
There are several different types of commercial leases, including:
Gross lease: All property expenses roll into one monthly payment, including utilities, insurance, and taxes.
Net lease: In addition to rent, the tenant pays their proportional share of property expenses, such as utilities, taxes, and maintenance costs. NNN, or triple net lease, is one commonly known version of a net lease.
Percentage lease: Total rent is a combination of a base amount plus a percentage of the tenant’s revenue.
Variable lease: The rent amount for this type of lease varies based on an index – often the Consumer Price Index.
How does a commercial lease work?
Commercial leases go way beyond specifying the rent amount by detailing every agreement between the lessor and the lessee. In addition, you’ll find items such as who shovels show, repairs the HVAC system, or pays for asbestos clean up.
Other things your lease might cover include:
• Rent increases
• Security deposit
• Length of the lease
• Improvements
• Description of the property
• Uses
• Signage restrictions and responsibilities
• Ability to assign or sublet
• Renewal date
After you read the lease and feel like you understand the rules and requirements, it’s a good idea to have your lawyer review it as well. Naturally, you’re in a hurry to access your commercial space. But spending the extra time to have an attorney look over the lease can prevent headaches down the road, especially if you’re a first-time tenant. Or, consider professional lease abstraction services to help you understand all the details and get them into a lease management system so you won’t forget any important details moving forward.
Can a landlord refuse to renew a commercial lease?
Yes. And maybe. It’s complicated.
As the property owner, your landlord may have the right to refuse to renew your lease — but it depends on some specific language in the contract. And that gets us back to the point about how important it is to have your lawyer review the document.
However, the landlord cannot evict you in the middle of a lease, and they can’t arbitrarily raise your rent in most cases. The rules can vary by state, so research local laws.
Do commercial tenants have rights without a lease?
You have some rights even without a signed lease if you already occupy the property. However, the rights vary by state. You’ll also have fewer rights than you would with a lease. All that to say – make sure you have a lease to CYA (cover your assets).
Can a landlord break a commercial lease?
Commercial lease rights depend on your specific situation. For example, your landlord can break the lease if you fail to meet the terms of your lease by forgetting to pay your share of the property taxes in a net lease or failing to pay rent on time. In most cases, they can’t just decide to end a lease with no warning and for no reason — unless the lease says they can.
There’s a lot to unpack when it comes to understanding leases. For the most detailed and comprehensive guidance, we recommend working with a broker who has the CCIM designation. And then to keep track of everything and share info with your team, get all your data and docs into a location management system.
Make lease management a piece of cake
Managing commercial property leases is tricky. Remembering to pay rent, sign renewal paperwork, pay your share of common area maintenance fees — it can get overwhelming.
That’s where Leasecake comes in. Our lease management software store all your information in one place, send you reminders, help you maintain ASC 842 compliance, and so much more.
Want to see what Leasecake can do and how tenants operate portfolios using our location management software? Schedule a free consultation, and we’ll review your needs and current workflow to see if Leasecake is right for your business.
