Free Commercial Lease Template

The world of commercial real estate is a dynamic and complex landscape that requires careful navigation, particularly when it comes to leasing commercial properties. A typical commercial property lease usually spans several years, influenced by factors like the agreed lease term and rental fee. Given the extended commitment involved, such leases commonly encompass several aspects of the agreement. For businesses located in the United States, understanding the intricacies of commercial leases is essential for securing the right space to thrive. This comprehensive guide aims to shed light on the nuances of commercial leasing, from types of leases to key considerations, with practical examples to help businesses make informed decisions.

Types of Commercial Leases

When it comes to commercial leases, there isn’t a one-size-fits-all approach. Different businesses have unique needs and preferences, which is why various types of leases exist. Here are some common types of commercial leases:

1. Gross Lease:

In a gross lease, also known as a full-service lease, the tenant pays a fixed monthly rent that includes all operating expenses such as utilities, maintenance, and property taxes. The landlord assumes responsibility for these costs. This type of lease provides predictable expenses for tenants and is often used in office spaces.

Example: A marketing agency signs a gross lease for an office space. The monthly rent covers not only the physical space but also utilities, janitorial services, and property taxes.

2. Net Leases:

Net leases come in three variations: 

Single net lease (N): In a single net lease, the tenant assumes responsibility for paying property taxes in addition to their rent, while the landlord typically retains additional expenses such as insurance and maintenance costs. This lease type provides a degree of convenience for the tenant, as they are only responsible for a portion of the property’s financial obligations, making it a simpler option for those looking to lease commercial space. Single net leases are commonly used for retail spaces and are favored by both landlords and tenants for their clarity and transparency in financial obligations.

Double net lease (NN): In a double net lease, the tenant assumes responsibility for paying two critical expenses: property taxes and insurance premiums while the landlord retains responsibility for the property’s maintenance and other operating expenses. This lease structure allows the tenant to have more predictable monthly costs, as they know their rent includes taxes and insurance, while the landlord manages upkeep and repairs. Double net leases are commonly used for properties such as office buildings and shopping centers, providing a balanced distribution of financial responsibilities between landlord and tenant.

Triple net lease (NNN). In a triple net lease, the tenant pays the base rent along with three additional costs: property taxes, insurance, and common area maintenance (CAM) expenses. This type of lease places more financial responsibilities on the tenant.

Example: A retail store agrees to a triple net lease for a storefront in a shopping center. In addition to the base rent, the tenant covers property taxes, insurance, and a share of the maintenance costs for the common areas.

3. Percentage Lease:

Commonly used in retail spaces, a percentage lease involves the tenant paying a base rent plus a percentage of their gross sales above a certain threshold. This arrangement allows the landlord to benefit directly from the tenant’s success.

Example: A boutique clothing store enters into a percentage lease with a mall landlord. The store pays a base rent and a percentage of its monthly sales exceeding $20,000.

Key Considerations for Businesses

Navigating the world of commercial leases involves careful consideration of various factors to ensure that the chosen space aligns with the business’s goals and needs. Here are some key considerations for businesses:

1. Location:

The old adage “location, location, location” holds true in commercial leasing. The location of a business can significantly impact its success. Consider factors such as foot traffic, accessibility, nearby competitors, and the target audience when selecting a location.

Example: A café owner selects a corner space in a bustling downtown area known for its pedestrian traffic. The prime location attracts both locals and tourists, contributing to the café’s popularity.

2. Lease Term:

Commercial leases typically have longer terms than residential leases, often ranging from three to ten years. Businesses must assess their growth projections and long-term goals to determine an appropriate lease term.

Example: A startup tech company opts for a five-year lease on an office space. The company’s growth plan aligns with the lease term, allowing for expansion within the same property.

3. Lease Structure:

Understanding the lease structure is crucial. Businesses should be aware of whether they are responsible for additional expenses beyond the base rent, such as utilities, maintenance, property taxes, and insurance.

Example: A small law firm signs a triple-net lease for an office space. The firm is aware that in addition to the base rent, they will be responsible for property taxes, insurance, and a share of the building’s maintenance costs.

4. Lease Negotiation:

Negotiating terms is an integral part of the leasing process. During this phase, both landlords and tenants engage in discussions to determine the terms and conditions of the lease agreement. Negotiations typically cover key aspects such as rent, lease duration, maintenance responsibilities, renewal options, and any specific tenant improvements or concessions. Successful lease negotiation requires effective communication, compromise, and a thorough understanding of the needs and objectives of both parties to reach a mutually beneficial agreement that aligns with their respective business goals. Businesses should be prepared to negotiate aspects like rent increases, lease renewal options, and tenant improvements.

Example: A medical clinic negotiates with the landlord to include a clause allowing them to make necessary renovations to the space to accommodate medical equipment and facilities.

5. Tenant Improvements:

Tenant improvements, or TIs, encompass the modifications tenants make to commercial spaces to suit their operational needs, ranging from interior changes like walls, flooring, lighting, and HVAC systems. Assessing whether tenant improvements are necessary is vital.  Typically, tenant improvements are negotiated between the tenant and the landlord during lease negotiations, and the responsibility for funding and overseeing these improvements is outlined in the lease agreement. Due to the possibility of additional costs that could be incurred businesses should clarify whether the property meets their specific requirements or if modifications are needed.

Example: A fitness studio leases a vacant commercial space and negotiates with the landlord to install specialized flooring, mirrors, and equipment to create an ideal workout environment.

Additional Considerations

1. Lease Renewal Options:

Businesses should also inquire about lease renewal options. Having the ability to renew the lease at the end of the term can provide stability and continuity, especially if the location has proven to be beneficial for the business.

Example: A restaurant secures a commercial lease with an option to renew for an additional five years. This option gives the restaurant the flexibility to continue operating in a popular location.

2. Common Area Maintenance (CAM) Charges:

In triple-net leases, tenants often share the cost of maintaining common areas such as parking lots, hallways, and landscaping. Understanding the breakdown of CAM charges and how they are calculated is essential.

Example: A business owner negotiates the inclusion of a cap on CAM charges in the lease agreement to ensure that the expenses remain manageable.

3. Assignment and Subleasing:

Some lease agreements allow tenants to assign their lease or sublease the space to another tenant. It’s important to clarify the landlord’s policies on these matters.

Example: A growing tech startup includes a clause in the lease agreement that allows them to sublease a portion of their office space to another small business, creating an additional revenue stream.

4. Security Deposits and Guarantees:

A security deposit, paid by a tenant upon signing a commercial lease, acts as protection for landlords against breaches of agreement or unexpected property incidents. Often called “damage deposits,” these funds can be utilized if property damage occurs or rent goes unpaid. Usually, a commercial lease security deposit equals one month’s rent and is paid upfront. The landlord holds it throughout the lease and returns it after lease expiration, provided the property remains well-maintained and lease terms are upheld. There are no set limitations for deposits within commercial leases. Potential alternatives such as personal guarantees or letters of credit can be used

Example: A landlord requires a security deposit equivalent to three months’ rent or a personal guarantee from the business owner to mitigate the risk of non-payment.

5. Use Restrictions and Zoning Compliance:

Businesses should ensure that the leased space aligns with their intended use and complies with local zoning regulations. Zoning compliance can affect the type of activities permitted in the space.

Example: A fitness studio considering a lease in a commercial building confirms that the zoning allows for fitness-related activities and that there are no use restrictions that could hinder their operations.

6. Dispute Resolution and Termination Clauses:

Including provisions for dispute resolution and termination in the lease agreement can help protect both parties in case issues arise during the lease term.

Example: A retail business includes a clause specifying a mediation process in case of disputes between the tenant and landlord, promoting a more amicable resolution.

7. Legal Review:

It’s crucial for businesses to have their legal counsel review the lease agreement before signing. Legal experts can identify potential pitfalls and suggest modifications that benefit the business.

Example: A law firm seeking to lease office space seeks legal advice to ensure that the lease agreement is fair and doesn’t contain any unfavorable terms.

Leasing commercial properties in the United States is a strategic endeavor that requires careful consideration of lease types, location, terms, and negotiations. By understanding the nuances of commercial leases and considering key factors, businesses can secure a space that aligns with their goals and sets them up for success. Whether it’s a retail storefront, office space, or industrial facility, making informed decisions during the leasing process is paramount for thriving in the competitive business landscape.