A commercial lease agreement is a contract between a landlord and tenant for the leasing of a property designated for retail, industrial, office, or other non-residential use. A commercial lease typically has a start and end date ranging from three (3) to five (5) years. The landlord will usually give the tenant what is known as a “vanilla box,” which is four (4) finished walls with access to the utilities on the premises. If any additional fit-up is required, it is to be negotiated between the landlord and tenant and incorporated into the monthly rent payment.
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Gross Lease – Tenant is obligated to pay the monthly rent amount with no obligations to pay for property expenses.
Modified Gross Lease – Tenant is obligated to pay the monthly rent amount with some obligations to pay the property expenses.
Triple-Net Lease – Tenant is obligated to pay the monthly rent amount with all obligations to pay for the property expenses.
Industrial – For warehousing, manufacturing, or other space used to produce and store goods. A portion may include some office space.
Office – For services only. This may be for any administrative use, such as accountants, attorneys, or insurance companies. Goods are not generally sold in office space.
Retail – For the selling of goods and products. There may be some office space on the premises, but retail space is primarily for selling items direct to the consumer.
A commercial lease is a contract used by an owner of a non-residential property who is willing to rent space to a qualified business or individual. Unlike a residential lease, the term is commonly longer (3-5 years) and the tenant may be responsible for property expenses (real estate taxes, insurance, and common area maintenance (CAM)).
In accordance with the Uniform Commercial Code which has been enacted in all fifty (50) States:
“Lease Agreement” means the bargain, with respect to the lease, of the lessor and the lessee in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance as provided in this Article. Unless the context clearly indicates otherwise, the term includes a sublease agreement.
Rent in a commercial lease is usually calculated on a price per square foot ($/SF) basis. This is calculated by the annual amount of rent divided by the total square footage of the livable area. This method of presenting the rent amount in price per square foot ($/SF) is preferred by potential tenants when looking for a property.
A commercial lease binds a tenant and a landlord to a set of rental conditions for a property that may be used for business-related use. In short, the process works by the landlord offering their property for lease, negotiating with a tenant, and signing the commercial lease.
- Step 1 – Finding / Leasing Property
- Step 2 – Tenant Screening
- Step 3 – Negotiating
- Step 4 – Agreeing in Principal
- Step 5 – Writing and Signing the Lease
- Step 6 – Certificate of Occupancy
A tenant will commonly find a commercial property for rent with websites like Loopnet, Showcase, and CityFeet. Tenants are advised to always use a real estate agent as they will rarely be obligated to pay while receiving representation. The real estate agents for both the landlord and tenant will split the commission as stated in the landlord’s listing agreement.
A commission is calculated based on the total lease amount for the term of the lease. For example, if a tenant signs a lease for $12,000/yr for 5 years and the commission is 5%, the commission owed would be $3,000.
The average real estate commission in a commercial lease listing agreement is between 3% to 8%.* For properties in “neighborhood centers,” the average commission is higher. For properties in “mall centers,” the commissions are lower due to the average lease being longer (remember that commissions are based on the length of the lease term).
- *Any statement mentioning an “average commission” could be construed as price-fixing according to anti-trust laws (15 U.S. Code § 2 of the Sherman Act).
Especially for local tenants, the landlord will want to know the kind of business or individual they are dealing with before negotiating any price in rent. Therefore, tenants should be asked to fill out a Commercial Lease Application and submit their personal information, including Social Security number (SSN) and, if a business entity, their Federal Employer Identification Number (FEIN).
Best Websites to Screen Commercial Tenants
Documents Required by Applicant
- Commercial Lease Application;
- Social Security Card (or number);
- Completed IRS Form SS-4 (for business entities that have a FEIN);
- Last two (2) years of business taxes (either IRS Form 8879-S or IRS Form 1120S); and
- Last two (2) years of personal income taxes (IRS Form 1040).
After the tenant views the space and shows interest in the property, the negotiating begins. When negotiating the price per square foot ($/SF), the parties should contact nearby properties that have recently been leased to find similar comparables. The best way to find out the “market rent” is to know what other tenants are actually paying in the area.
Most commercial leases take 1-2 weeks for the attorneys/agents to handle. Therefore, a simple agreement in principle is commonly made outlining the agreed-upon rent, responsibilities of utilities and services, and any other expenses of the property. This information can be written in an e-mail or entered into a letter of intent. At this stage of the negotiation, the parties remain unbound to each other.
Notarizing – A lease should be drafted and signed amongst the parties. For any lease totaling $50,000 or more in rent, it is highly recommended to have the commercial lease notarized. Using a notary verifies the identity of both parties through government-issued identification.
eSignature – For lesser leases, it’s recommended that the parties eSign the commercial lease.
Security Deposit – Unlike residential leasing, there is no maximum limit on the amount that can be required for a security deposit. The landlord can charge as much as desired.
Most properties that are remodeled or new construction for a tenant must receive a Certificate of Occupancy to ensure the building was constructed within the rules of local codes. This is commonly done by applying to the specific building department in the municipality and scheduling an inspection.
After a successful inspection, the property and tenant will be given a Certificate of Occupancy, which allows the tenant to move in and begin business activities.
Getting out of a commercial lease legally and with minimal effect on your credit score relies on the landlord’s consent. Any change to a lease requires the consent of both parties. Therefore, the landlord will require some type of termination fee or sublease option so the landlord can be compensated appropriately.
Step 1 – Approach the Landlord
The tenant should approach the landlord and state their reasons why they can not continue any longer with the current lease in place. If the landlord recognizes that the tenant can no longer afford the rent, they will most likely be agreeable to terms that allow them to vacate the property.
Step 2 – Negotiate the Termination
There are three (3) common ways the landlord will allow the tenant to terminate a commercial lease:
- This would require a Lease Release Form.
2. Pay Until New Tenant is Found – The landlord only releases the tenant from the lease after a new tenant signs a lease. The tenant will be obligated to pay rent until the new tenant is found.
- This would require a Lease Release Form.
3. Option to Sublease – The landlord does not release the tenant but allows subleasing. This would be an amendment added to the original lease that permits the tenant to market the property and sign a sublease with a new business or individual. The tenant will remain obligated to keep paying rent under the original agreement with the landlord.
- This would require a Consent to Sublease Form.
Step 3 – Moving Out
After the negotiations are agreed upon, the tenant may now vacate the property. The tenant will be required to leave the property in similar or like condition as it was presented upon moving in.
In most situations where the tenant leaves early, the security deposit is forfeited to the landlord.
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1. Agreement Date – The day the agreement is written, not the move-in date.
2. Landlord’s Name and Address
3. Tenant’s Name and Address
Step 2 – Property Information and Monthly Rent ($)
4. Property Address
5. Rentable Space – The total square footage of the rental property.
6. Usage – The allowed uses of the property. It’s recommended the landlord and tenant use NAICS Codes.
7. Initial Term – The total number (#) of months of the term and the start and end dates of the lease. This does not include any renewal periods.
8. Monthly Rent – Enter the rent payable on a monthly basis and the day of the month when rent is due. If the rent increases during the initial period, it should be stated as well.
Step 3 – Security Deposit, Late Fee, and Renewal Options
9. Security Deposit – Enter the amount the tenant is required to pay for the security deposit. There is no limit to how much the landlord may request (unlike residential property).
10. Late Fee – Enter when rent is considered late and the late fee if not paid on time.
11. Renewal Options – If the tenant has options to renew, the amount should be written along with the renewal period.
Step 4 – Upfront Payment(s), Possession, and Liability
12. Upfront Payments – Enter any required upfront payments, such as the first (1st) month’s rent, last month’s rent, and security deposit due upon the signing of the lease.
13. Possession – The date the tenant takes possession of the property.
14. Insurance – The amount of insurance required by the tenant for personal injury, death, and property damage.
Step 5 – Proportionate Share
15. Proportionate Share – The percentage of the total property the tenant is renting. For example, if a single-tenant building it would be 100%. For multi-tenant property, the tenant’s property is divided by the total square footage of the entire property.
Step 6 – Type of Commercial Lease
16. Select the Type of Lease – Either Gross, Modified Gross, or Triple Net (NNN). The landlord and tenant will be required to place their initials in this section.
Step 7 – Lessor’s Right to Entry, Damage, and Notices
17. Lessor’s Right to Entry – This area states that the landlord has the right to enter the property with “reasonable notice” and that a “For Rent” sign may be placed in the window with specified notice.
18. Damage By Casualty.
19. Notices – Notices for legal correspondence.
Step 8 – Additional Terms, Attachments, and Signatures
20. Additional Terms and Conditions – If there is anything more to add to the lease, it can be entered here.
21. Attachments – If there are any attachments, their titles should be mentioned in addition to adding the page(s) to the agreement.
22. Signatures – Signatures of the landlord, tenant, and real estate agent (if any).