The Ultimate Guide to Commercial Lease Agreements

Whether a person is a property owner or tenant, the first step to signing a commercial lease agreement is understanding the agreement. Commercial lease agreements are known for their multiple forms of “hard” jargon that may be difficult for even the most experienced in commercial real estate to understand. Explore the guide to become familiar with commercial lease agreements and what to expect to better prepare for the signing. 

This ultimate guide features a comprehensive overview of everything you need to know about commercial lease agreements: terms, standard forms, best uses and appropriate times for each type of lease agreement, FAQs, and a series of case studies that provide a sense of how to use these agreements in real-world situations.

What is a commercial lease?

A commercial lease is a legally binding agreement between a landlord (usually the property owner) and a business tenant. Ultimately, the owner signs as the “LESSEE,” and the tenant signs as the “LESSOR.”

A commercial lease agreement grants the Lessor tenant-specific rights to the property owned by the Lessee. The purpose of the lease is to outline the obligations of both parties to uphold. 

Commercial real estate brokers negotiate these agreements on behalf of their respective clients on some occasions. 

What can typically be expected in a lease agreement? 

Typically, a commercial lease agreement includes the following:

• The names of the parties signing the agreement
• A legal description of the property, including the address and sometimes the physical boundaries of the property
• The type of leased property, for example, an industrial building, an office building, a retail center, etc. 
• The square footage of the leased space
• The length of the tenancy and whether the tenant has an option to renew the lease with specified terms
• The base rent for the property with specified terms
• Whether the landlord collects a security deposit and the amount 
• A description of how tenants can use the property – some properties are for business only 
• Whether the building owner will improve the property with specified terms – this is called the “tenant fit-out” 
• What fixtures, if any, the lease includes, for example, sinks, lighting, shelving systems, furniture

Commercial lease agreements include a lot of information and can be considered quite complex. The bullet points above are just the minimum that a lease should contain. Most commercial leases will be much more detailed in practice.

The Three Most Common Types of Commercial Leases 

Each type of commercial lease agreement serves a different purpose to those in the industry. Here are three of the most common types of commercial lease agreements:

1. The Net Lease

This is the most popular type of commercial lease agreement. With a net lease, the tenant is responsible for a base rent payment plus all the utilities, insurance, maintenance, and other expenses associated with occupying the property. Similar to renting a single-family home, the owner only pays the mortgage. 

There are many net leases, with the tenant’s obligations differing in each. 

Single Net Lease Agreement Terms:

A single net (n) lease agreement is the simplest form of net lease and the least common. The tenant pays the rent and the property tax associated with renting space with this lease structure. One reason owners use single net leases is it helps them ensure timely payment of property taxes.

Double Net Lease Agreement Terms:

Double net (NN) lease agreements are common in multi-tenanted buildings.  A double net lease agreement makes the tenant responsible for the base rent, property taxes, and the cost of building insurance. The structure holds the landlord responsible for paying utilities, maintenance, and other expenses – leaving the owner liable for all structural issues. 

The landlord generally prorates property taxes and building insurance for each tenant’s share relating to their total leased square footage. This lease agreement eliminates the owner’s duty of prorating the costs amongst different tenants. 

Triple Net Lease Agreement Terms:

Triple net (NNN) lease agreements are the gold standard in commercial real estate. This lease structure makes the tenant responsible for the majority of costs, specifically the base rent, property taxes, insurance, utilities, and maintenance. For this reason, a triple net lease usually has a lower rent cost. 

The lease allows for a hands-off approach to ownership, eliminating the owner’s need for day-to-day management.

Bondable Net Leases

A bondable net lease is a variation of the triple net lease agreement but is more rigid in that the lease cannot be terminated before expiration. The significant difference is that a bondable net lease places every possible risk associated with the property on the tenant. 

This means that if something like a natural disaster happens and significantly damages the property, the tenant would be responsible for the rebuilding effort, and the tenant will continue paying rent to the landlord in the meantime.

2. The Gross Lease

There are two types of gross leases that commercial real estate professionals use: 

The Full-Service Gross Lease:

A full-service gross lease is where the tenant simply pays a predetermined, fixed rent payment every month. The property owner covers all other costs, including operations and maintenance –  insurance, utilities, property management fees, and state and local taxes. This is comparable to staying at an all-inclusive resort – pay one flat fee, and the rest of the amenities are included.

The Modified Gross Lease

A modified gross lease agreement is similar to a full-service gross lease with one major exception – the tenant is responsible for any incremental increase in the building owner’s operation costs beyond the costs calculated in the base year lease. For example, if a city increases property taxes during a specific year, the tenant in a modified gross lease situation may be obligated to pay a portion (or all) of that increase.

3. The Percentage Lease

The percentage lease agreement is a type of commercial lease that restaurants and retailers most often use. With a percentage lease, the tenant pays a base rent (a minimum amount of rent) and a percentage of the business’s gross income. 

The rent payment is calculated as Base Rent + Percentage of Gross Profits, with an agreed-upon percentage by both parties during the lease negotiation process.

Understanding Frequently Used Commercial Lease Agreement Terms

Below, explore the commonly used terms across the various lease types. 

Additional Rent 

Additional rent refers to the charges a tenant will pay and is not included in the base rent, such as common area maintenance (CAM) fees, after-hours service, parking fees, etc.

Agent

An agent is any person authorized to act for or in place of another. A real estate agent represents a landlord or tenant in a property lease regarding commercial lease agreements. The agent may be a broker, salesperson, or an attorney representing the owner or tenant.

Alterations

Alterations refer to any substantial change to real estate, especially to the premises, and usually do not involve adding or removing the exterior of the building’s structure.

Anchor Tenant

An anchor tenant is a large tenant that draws traffic to the site. The term “anchor tenant” is most often used in retail leasings, such as a grocery store that “anchors” a shopping center and draws people there every day. A large employer can also be an anchor tenant in a commercial building.

Arbitration 

Arbitration refers to a non-judicial dispute resolution process that involves a hearing and determination of a disputed issue by one or more neutral third parties whose decision is binding.

Assessments 

Assessments are the imposition of a tax, fine, or other amount levied against property, commonly by the government. An assessment can be issued to tenants by a property owner, depending on the signed lease type. This is typically a “special assessment” and will be prorated to tenants based on their occupiable square footage. 

Assignment

An assignment refers to the transfer of an interest in real property. In practical terms, a tenant often wants to end their lease early and assigns their lease to a third party. That third party must then fulfill all obligations of the original tenant for the duration of the leasehold period.

Base Rent

The base rent is the minimum rent due under a standard commercial lease agreement. Additional rent may be required depending on the lease structure.

Base Year

The base year is usually the first year of a lease to which future operating expenses are compared to calculate expense increases.

Building Factor

Building factor, often referred to as the “core” factor or “load” factor, represents the percentage difference between the usable and the rentable square footage. This calculation makes accommodation for the unusable square footage (and therefore, un-rentable), such as building lobbies, bathrooms, corridors, etc. The building factor can be calculated at the building level or on a floor-by-floor basis.

Build-Out

The build-out refers to any work required to prepare the premises for the business to operate out of the space on the first day of their lease agreement.

Building Class

Commercial properties are often classified as Class A, Class B, or Class C. 

• Class A: properties are generally the newest and highest quality buildings, typically in premier locations with credit-worthy tenants that are professionally managed and offer several amenities. 
• Class B: properties tend to be a little older and may not be as well-located, but they still have strong management and tenants. 
• Class C: the bottom-tier properties are usually older and located in less desirable areas that may need renovations.

Certificate of Occupancy 

This refers to the legal notice indicating that a building complies with all local zoning and building ordinances and is ready for a tenant to occupy.

Clear-Span Facility 

A clear-span facility is a building that does not have any vertical columns running through the rentable space. The clear-span width is the space between the columns and is most frequently found in warehouses, industrial facilities, and parking garage structures. 

Common Area

Areas of the project are available for use by all tenants on a non-exclusive basis, such as hallways, lobby areas, parking lots, courtyards, etc.

Common Area Maintenance 

The common area maintenance (CAM) expense is an amount charged to tenants on top of the base rent as additional rent. It is mainly used to cover the cost of maintenance fees for work performed to maintain the property’s common areas. CAM fees are assessed to tenants on a prorated basis depending on occupiable square feet.

Common Area Maintenance Cap

The maximum amount the tenant can be charged for its share of common area maintenance expenses.

Condemnation 

The taking of private property by a public agency through the right of eminent domain for a public purpose, like a new highway ramp, upon the payment of just compensation by the government agency to the property owner. Situations of condemnation are rare but do occur. 

Consideration

Consideration can come in the form of money, personal property, or a promise to do or not do something by one party to get another to enter into a contract. 

Default

An entity is in default of a commercial lease agreement when it has failed to fulfill its complete terms and conditions.

Demised Premise

The term “demise” means to transfer or convey. In commercial lease agreements, it refers to the landlord conveying the premises to the tenant, thereby creating a leasehold estate or the demised premises.

Doing Business As 

Doing Business As or D/B/A is a term often used to refer to the name of business operations that differs from the registered legal name of the company.

Due Diligence

Due diligence refers to examining and investigating a property for the potential tenant, lender, or purchaser. Failure to exercise due diligence may sometimes result in unanticipated costs or liabilities.

Easement

An easement is a publicly-recorded legal agreement that gives one party the authority to use another person’s property for a specific purpose. The current owner maintains ownership of that property, but grants use to the other party for a period of time (sometimes indefinitely). For example, a property owner may provide another owner with an easement to use a strip of land as a driveway if there is no space on his property for that driveway.

Eminent Domain

Eminent domain is the power of the government to take private property for public benefit. For instance, a utility company may need to take a strip of land from a private landowner to extend gas service to a new development project. Eminent domain proceedings are typically rare, and when evoked, the public entity taking the land must provide just compensation to the owner in exchange for the land.

Estoppel Certificate 

An estoppel certificate is a signed statement that certifies specific facts to be true. In commercial real estate agreements, it mainly verifies the terms and conditions and the current status of a tenant’s lease.

Exclusivity 

Commercial real estate agreements use exclusivity to prohibit an owner from leasing to another tenant with similar business uses. Exclusivity provisions are standard in retail leasing situations. For example, a fast-casual burger chain might require that an exclusivity agreement be part of a lease before moving into a new outdoor shopping center. This means that the landlord cannot rent space to any other fast-casual burger restaurants that may compete with their business.

Execution

In commercial lease agreements, “execution” sometimes means signing a legal document. Execution also refers to the act or process of performing any duties or obligations under a signed lease.

Expense Stop

The maximum amount a landlord will pay for certain operating expenses.

Fair Market Value

The price a buyer is willing to pay, and a seller is willing to accept in an unrelated, arms-length transaction in the open market. In commercial lease agreement terms, this is often used to describe the method for determining the value of rent, such as fair market rent.

Landlords may use fair market value when the lease contains an option-to-purchase provision. In this case, the landlord gives the tenant the option to purchase the property at a specific time (or at any time during the duration of the lease agreement) for fair market value.

Flex Space

Flex space is a building classification that indicates the space is useful for multiple purposes, like a combination of office, industrial, or warehouse space. An excellent example of flex space is a car showroom that needs a giant floor to display vehicles and office space where employees can work and host meetings. 

Floor Plan

A floor plan is a drawing that shows the design of a building or room from above. Commercial lease agreements usually include these to indicate which areas the tenant will be able to occupy.

Fit-Out

Fit-out typically refers to activities making a commercial tenant’s interior space suitable for occupation. Often, a tenant’s contractor does fit-out construction instead of the landlord’s construction company.

Gross Lease

As mentioned above, a gross lease is a type of rent structure under which the tenant pays all-inclusive rent. The landlord covers all other occupancy expenses such as utilities, taxes, insurance, and maintenance.

Guaranty

A guaranty is the written promise of an individual to pay the debt of another. In a commercial setting, a guaranty is typically the promise of an owner or officer of a corporate entity to pay the debt of that corporate entity should it default on its obligation.

Hazardous Waste 

Hazardous waste is often referred to as hazardous material or dangerous substances. This term refers to dangerous substances that may harm human health or the environment because of their physical or chemical composition, quantity, or concentration.

Heating, Ventilation, and Air Conditioning 

The Heating, Ventilation, and Air Conditioning or HVAC system refers to the system used to provide heating and cooling services to a building.

Holding Over

When a tenant continues occupying a premise after the expiration of the original lease term, this is referred to as holding over.

Indemnity

With a real estate indemnity agreement, one party pledges to protect another (“indemnify”) from financial loss or a lawsuit.

Kick-Out Clause

A commercial lease agreement term allows a tenant or landlord to cancel the lease after a certain time has passed or certain conditions have not been met.

Landlord

A person or entity (often called a Lessor) that owns real property and leases it to a tenant (often called a Lessee).

Lease

A legally-binding contract under which an owner of real property grants another the right to use the real property in exchange for rent or other consideration. In commercial real estate, there are multiple types of leases, including a single net (N) lease agreement, double net (NN) lease agreement, triple net (NNN) lease agreement, gross lease, and percentage leases.

Leasehold Estate 

Leasehold Estate refers to a tenant of a temporary right to occupy and use a property for the duration of a lease in exchange for rent.

Lessee

Lessee is another term for a tenant.

Lessor

Lessor is another term for landlord or property owner.

Letter of Credit

A letter issued by a bank to another bank to serve as a guaranty for payments made to a specified person or entity under specified conditions is a letter of credit. 

Letter of Intent  

In terms of commercial lease agreements, a letter of intent (LOI) describes a document outlining certain agreements between parties (usually the business terms of the deal) for the agreements to be finalized in a formal, comprehensive lease or sales contract. 

Lien

A monetary encumbrance on a specific property (real or personal) makes the property security for the satisfaction of a debt, or the performance of an obligation is a lien. A mortgage is the most common form of lien placed on a property.

Liquidated Damages 

A clause in a commercial lease agreement stipulates a fixed dollar amount of damages or a calculation for determining such damages to be collected by one party upon a breach of contract by the other party.

Load Factor

Usually found in commercial lease agreements for office buildings, the load factor refers to the percentage of non-rentable space – the lobby, restrooms, corridors, and elevators. Each tenant is charged pro-rata based on rentable square footage.

Mechanic’s Lien

A mechanic’s lien is a type of lien placed on a property for failure to pay labor or materials needed to repair or improve a property. Specific forms of mechanic’s liens include a construction lien (for labor) and materialmen’s lien (for materials).

Mediation

Mediation is a non-judicial dispute resolution process where a neutral third party assists disputing parties in reaching a mutually-agreeable solution.

Merchant’s Association

In retail shopping centers, the developer or owner forms an association of merchant tenants to finance the center’s promotion as a whole.

Minimum Rent 

In commercial lease agreements, the minimum rent refers to the base, fixed rent applicable for a certain period. Minimum rent can be subject to adjustment periodically, based on negotiated terms.

Mortgage

A mortgage is a legal instrument that makes specific real property security to repay a loan or perform other obligations.

Multi-Tenant

A multi-tenant property is occupied by more than one tenant or leased to.

Net Lease

As described above, a lease in which the tenant is responsible for direct payment of property expenses, including taxes, insurance, maintenance costs, and rent.

Non-Competition Clause

A non-competition clause prohibits a landlord from leasing space to another tenant engaged in the same or similar business as the tenant signing the lease or a tenant from opening multiple locations within a certain radius of the existing location. 

Occupancy Cost

Occupancy cost is the total cost of leasing space, including minimum rent, percentage rent, taxes, insurance, maintenance, parking fees, advertising fees, merchant association fees, and any other charges assessed periodically.

Option

An option is the right given in exchange for consideration by a landlord to a tenant to buy or lease the property under specific terms and conditions in a particular period without obligating the tenant to exercise the right. There are two standard options in a commercial lease agreement: an option to extend or purchase.

Landlords use an option to extend when a tenant has signed a lease for a specific time and then has an opportunity to extend their lease for a certain number of years. It is common for a tenant to have multiple options to extend when signing a lease. An option to purchase refers to a tenant having the opportunity to buy the property during the lease period, or at the end of the lease period, for a predetermined price, such as fair market value.

Ordinances

Laws passed by governments that property owners and their tenants must abide by (such as noise ordinances).

Partial Taking

The partial taking is the condemnation of only a portion of an entire property by a government agency for public use and just compensation. For example, condemnation of a strip of land abutting a parking lot may be used for road widening purposes.

Percentage Rent

Percentage rent is common for commercial lease agreements in the retail sector. The landlord charges rent to a tenant based upon a percentage of their gross sales.

Permitted Uses

Permitted use refers to a specified property’s uses that comply with local zoning ordinances.

Possession

In commercial lease agreements, possession describes the giving or taking of occupancy of a premise. Possession of a property can occur before, at the same time, or after the commencement date of the lease or commencement of rent.

Premises

The actual space in a building the landlord leases to a tenant for its exclusive use.

Prime Lease

Arises in subleasing situations and refers to the original lease of the subject premises to distinguish it from the sublease. We sometimes refer to a prime lease as the master lease.

Pro-Rata Share

Pro-rata share refers to the proportion of costs allocated to a tenant in a multi-tenanted property. Typically, pro-rata allocation gives how much a tenant pays for taxes, insurance, and common area maintenance expenses equal to the percentage that a tenant’s rentable square footage bears to the total rentable square footage of a property. 

Property

Land, and any improvements (such as the buildings), are considered “real” property. Everything else (such as the furniture within the building) is considered “personal” property.

Quiet Enjoyment

Quiet Enjoyment refers to a property owner’s right, or a tenant, to use the property without interference from another party. Tenants get quiet enjoyment as long as they comply with all the terms and conditions of their agreement.

Recapture

In the context of commercial lease agreements, recapture is the right of a landlord to take back space from a tenant. This happens when a tenant doesn’t meet performance standards specified in the lease for sales volume, rent, or other reasons.

Recordation

Recordation is the filing or recording of a legal document with the appropriate recording office to make it of public record. When a recording document, it gives notice to interested parties of the existence of an encumbrance affecting the property. Deeds or mortgages are recorded. The recorder gives notice of a transfer of property or lien on the property.

Relocation

In a commercial lease agreement, relocation refers to the negotiated right of the landlord to move a tenant from one location to another within a building or project.

Rent

Rent is the consideration paid for the use and occupancy of the property.

Rent Abatement

A release of a tenant’s obligations to pay rent for a period under certain specified situations, such as a casualty event or an act of God, refers to rent abatement. 

Rent Concession

Rent Concession is a period of free rent given to the tenant by the landlord.

Rentable Area

The square footage of a property for which the landlord charges rent. Rentable Area can be compared to “usable area.”

Right of First Refusal 

As a commercial lease agreement term, this refers to the negotiated right of a tenant to match any bona fide offer received by a landlord to lease or sell the demised premises.

Rules and Regulations

Rules and Regulations are often incorporated in a lease or document to describe critical operational aspects of the building or complex, such as hours of operation, noise control, parking regulations, delivery procedures, trash removal, etc.

Single-Tenant 

Property leased to only one tenant.

Square Feet

The unit of measurement used to calculate the floor area of space is the spare feet. 

Structural Elements

The parts of a building constituting its “shell,” including the foundation, floor, walls, roof structure, sewer lines, water mains, and utility systems from the street to the building.

Sublease

A sublease allows the original tenant to sublet all or a portion of the leasehold interest to another tenant (referred to as the “subtenant”) while retaining a leasehold interest in the property.

Subordination

Subordination refers to moving a claim or right against a property to a lower priority position. We often refer to this in the context of mortgages. In this case, a lender agrees to subordinate the first mortgage lien to a second mortgage lien.

Subrogation

Subrogation is the substitution of one party for another concerning a right or claim. In commercial lease agreements, this term arises in insurance clauses in reference to the concept under which an insurer pays a loss under an insurance policy and is entitled to all the rights and remedies of the insured against a third party concerning any covered loss.

Tenant 

A tenant is a  person or entity that occupies and holds the right to possess real property owned by another. This is another term for the lessee.

Tenant Improvement Allowance

A tenant improvement (TI) allowance is the amount negotiated in the lease that a landlord is willing to give a tenant to improve the premises. Landlords typically recover the tenant improvement allowance from the tenant through the rent over the lease term.

Tenant Improvements 

Tenant improvements (TI) are the modifications to the leased property to accommodate the tenant’s specific needs, such as interior walls, flooring, light fixtures, doors, window treatments, etc. Tenant improvements can be inside or outside of the premises and can be paid for by the tenant, landlord, or both. The costs of these are typically negotiated during the initial leasing process.

Term

The length of time during which the lease is in effect.

Termination

Ending or canceling a lease for any reason.

Trade Fixtures

Personal property affixed to real property by a tenant refers to the trade fixtures. These are necessary to conduct business but are removable by the tenant at the end of the lease. This could include shelving units, for instance, that a warehouse operator must install to run its business.

Triple Net Lease

As described above, the Triple Net Lease (NNN) is the most common commercial lease agreement in which a tenant pays rent plus all the property expenses, leaving the landlord with an amount “net” of such property expense costs.

Uniform Commercial Code, Form 1 (UCC-) 

This is a standardized, recorded form of a financing statement that provides notice of personal property pledged as security.

Usable Area

The actual square footage available for the tenant’s use – differs from the “rentable area.”

Use Clause

A use clause limits the tenant’s use of the rented space. The limitations can be broad or narrow, depending on the quality level of a business operation.

Use Permit

A permit obtained from the local planning department (at the city or county level) that allows an owner or tenant to use a property for a purpose not permitted under the standard zoning ordinance. A tenant may insist that they secure a use permit before finalizing any long-term lease agreement.

Valuation

Valuation is the process of determining the value or estimated value of a property.

Waiver

A wavier is signed to give up or relinquish the privilege to enforce a right.

Frequently Asked Questions

Below are some of the most frequently asked questions about how commercial lease agreements work in real-life. 

What do I need to know about “Tenant Improvement” allowances?

Landlords will generally provide tenants with what’s known as a “TI” allowance, which are funds provided by the landlord to the tenant to build out new space or alter/renovate existing, previously occupied space for the new tenant’s particular use.

Several factors influence the size of the allowance a landlord will commit to build, improve, or renovate tenant spaces. These include tenant size and creditworthiness, lease rate, lease term, market conditions, and competition.

As a general rule, landlords typically invest in TI projects for larger and more creditworthy tenants with longer lease terms.

Tenants may utilize property investments such as elevators, a new roof deck, and improved electrical infrastructure. These are different than investing in niche – TI projects are geared toward specific tenants.

How are security deposits handled in commercial lease agreements?

Landlords can collect a security deposit before or at the start of a lease term. This security deposit must be held in an escrow account. The landlord can only touch this money if a tenant damages the property or if a tenant fails to fulfill their monetary obligations per the lease agreement – failure to pay rent, taxes, or insurance.

Unlike those in residential real estate, security deposits in commercial real estate have very little regulation. This gives landlords the freedom to charge what they deem necessary and to use the deposit as they see fit. It even applies to collecting interest on the deposit.

Commercial real estate security deposits are fully refundable and aren’t used to repair everyday wear and tear. If no damage occurred during the lease term and the tenant paid rent on time, the tenant expects the landlord to refund the entire deposit. A tenant usually receives their deposit within 30 or 60 days of the lease expiration.

Security deposits cost can range from anywhere. It often depends on whether the tenant has a gross or net lease agreement. It also depends on factors such as TI allowance and tenant credit. Those with higher TI allowances tend to have higher security deposits due to the money the landlord invests on the front end. Meanwhile, a tenant’s creditworthiness plays a significant role in the security deposit’s amount. Usually, established companies with strong financials and a proven history of on-time payments have lower security deposit requirements. It’s even possible for large established multinational corporations to pay no security deposits.

When Do Rents Increase In A Commercial Lease Agreement?

Rent will not usually remain static under a lease where that lease exceeds 3 to 5 years in length. After that period, commercial lease agreements will typically include some sort of rent escalator. The rent escalator might be a set increase in rent or a percentage increase. In the case of a percentage increase, landlords often tie that increase to some formal index – retail price index or consumer price index.

Commercial lease agreements tied to an index should specify whether that rent increase will be compounded. This occurs when applying the increase in the index year on year. A more favorable approach to tenants stipulates that the rent should at any given year only increase according to the increase in the index. The rent would be calculated by reference to the index in the month immediately before the start of the lease term. This is compared to the index figure immediately before the relevant anniversary of the term in question.

The Alternative to Indexes

An alternative way (and arguably the most common way) to increase the base rent is putting a lease under rent review. Rent review is when the rent adjusts based on a review and valuation of the lease in the open market.

In the case of long-term leases subject to rent review, most will stipulate that base rent cannot go down. Even if the market deteriorates, rents stay the same. Instead, the rent will only increase if the value of the lease on the open market has since increased. Most leases include a termination clause. This allows a tenant to back out of a lease upon rent review, but only if the adjusted base rent becomes too high for the tenant to bear.

Tenants often use this clause as a bargaining chip with a landlord who otherwise worries about vacancy if the tenant ends the lease. For example, a landlord might initially decide to increase the base rent by 10%. The tenant decides this is too much to bear and does not want to renew the lease. The landlord has to make a decision: forego the 10% increase or face a potential vacancy? A property that sits vacant for several months may be much more costly to the landlord than keeping rents even.

How often are commercial leases renewed?

Commercial lease agreements can vary in term. Some leases run month-to-month, which is particularly true when dealing with smaller commercial properties.

Others have lease terms for 30+ year periods. However, these tend to be large retailers or national chains with a proven track record in the industry.

Most commercial leases have one of the following structures:

• Fixed End Date: a lease with a fixed end date gives each party certainty around when the tenancy will end. All terms of the lease remain the same during the period and neither party must give the other notice before terminating the lease.
• Automatic Renewal: Some commercial lease agreements automatically renew after a certain period.  This happens unless either party gives the other advanced notice. For instance, the owner of a bakery might sign a yearly lease with an annual automatic renewal on July 1. The terms of the lease remain in effect, including rent payment, unless the parties renegotiate the lease.
• Lease Options: Somewhere between a fixed-end date and automatic renewal is a lease option. In this type of commercial real estate lease agreement, the tenant agrees to occupy the premises for a fixed period. At the end of this period, the tenant can extend their lease for a specific duration at already agreed-upon terms. We call this exercising their option.

If a business is suffering, can I back out of a lease?

It depends. The commercial lease agreement should specify whether the tenant has the right to sublet the premises or terminate the tenancy. If the lease contains a termination provision, it should specify when and why a tenant can end a lease. It also indicates how much notice a tenant must give the landlord prior to terminating the lease.

Does a commercial lease agreement become null and void if an owner sells a property?

No. Most leases will remain in full force and effect under the new ownership unless otherwise specified. It is important to refer to the original commercial lease agreement for clarity. The commercial lease agreement should address landlord assignment.

At Lumicre, LLC, we have expert experience in assisting and guiding successful commercial real estate projects on all ends. If you need more information on commercial real estate lease agreements or would like to speak to an expert designed to help meet any of your needs, contact us today!