A commercial lease agreement is a legal document that allows a tenant to rent a property, such as an office, store, or warehouse, for business purposes. It outlines the tenant’s right to use the property in exchange for rent and possibly other fees, such as operating costs, taxes, maintenance, and parking. Tenants are permitted to conduct business on the premises as long as they adhere to the specified terms. Tenants may also be responsible for property taxes, insurance, and maintenance expenses. Real estate laws vary by state, so using a state-specific lease template is important to ensure compliance with local requirements. When do you need a commercial lease agreement? You need a commercial lease agreement whenever you rent out non-residential property to a business. Whether you’re leasing out office space, a retail storefront, a warehouse, or a restaurant location, a written lease protects both parties and clearly defines the terms of the rental. Common use cases include leasing a storefront to a retailer, renting an office to a professional services firm, providing warehouse space to a distributor or manufacturer, and leasing a commercial kitchen to a catering company. Not having a written lease can lead to serious issues such as disputes over rent, confusion about maintenance responsibilities, lack of legal recourse, and even violations of state laws. Always put your agreement in writing.
Types of Commercial Lease Agreements
There are four main types of payment structures in commercial lease agreements based on how the tenant pays base rent and operating expenses. One type is the Full Service or Gross Lease. In a full-service or gross lease, the rental rate includes all property operating expenses. This structure simplifies budgeting for the tenant, as the quoted rent is typically a single, all-inclusive figure. However, tenants should be aware that this may result in a higher base rent compared to other lease types. The specific inclusions can vary, so it is crucial to review the lease terms carefully to understand exactly which expenses are covered.
Key Clauses and Considerations
When drafting or reviewing a commercial lease, specific clauses are often included to address particular legal and operational requirements. If desired, include a clause requiring the payment of the prevailing party’s legal fees in the event of a dispute surrounding the lease. This clause can incentivise parties to resolve disputes amicably but may also increase the financial risk for the party that loses a legal challenge.
ADA Compliance and Hazardous Waste Clauses
Add clauses for ADA accessibility and compliance with environmental laws regarding hazardous materials. For example, the Americans with Disabilities Act (ADA) – ADA (42 U.S. Code § 12183) – requires that any business that serves the public or has fifteen (15) or more employees must equip their property with an entryway that is accessible to those with disabilities. This act should be included within the content of the lease agreement for the purpose of clarifying that the landlord and tenant both acknowledge this law that was put forth by the federal government.
Regarding hazardous waste, individuals participating in a lease for commercial property may cite this law concerning the proper disposal of harmful waste materials as it pertains to the tenant’s trade. Landlords may also include a provision that states that the tenant is prohibited from having hazardous materials on the premises without their consent. This is particularly important for businesses involved in manufacturing, cleaning, or other industries that may use or generate hazardous substances.
Lease Changes and Tenant Modifications
Commercial leases often need updates during or after the original term. Whether you’re renewing, extending, modifying terms, subleasing to another tenant, or offering a purchase option, use the correct form to make those changes legally binding.
Lease Renewal Agreement
Use this when the tenant wants to continue leasing the property after the original term ends under similar or revised terms. A lease renewal agreement formalises the continuation of the tenancy, preventing a lapse into a periodic tenancy which might be governed by different, often less favourable, terms.
Lease Addendum
A commercial lease addendum allows changes to an existing lease during its ongoing term without drafting a new agreement. It’s ideal for updating terms like rent, responsibilities, or permitted use. For instance, if a tenant wishes to change the type of business conducted on the premises, an addendum can formally document this change and any associated adjustments to the lease terms.
Lease Extension Addendum
This is a short-term arrangement that extends the end date of an existing lease without rewriting a new agreement. It is useful for bridging a gap between the end of a fixed term and the start of a new long-term lease, or for providing a temporary extension while negotiating a full renewal.
Understanding Commercial Property and Zoning
Unlike residential property where the main goal is to live on the premises, commercial property’s main function is to accommodate a business’s operational needs. But, not all real estate can be converted to commercial property, it must be located within a certain area that is zoned accordingly. Also, there are different kinds of zoning for the different types of commercial properties. The main types being:
- Retail – Property utilized by companies to sell their products/goods, e.g. various types of stores, malls, shopping centers, etc.
- Office – Commercial space where a business can locate a workplace for its employees to carry out certain office activities (typically for administrative purposes).
- Industrial – Larger properties generally used to contain a warehouse or factory operation, i.e. for manufacturing purposes.
Retail and office properties are commonly zoned under the same category, whereas industrial space is zoned under a separate classification. Retail and office space is used strictly for “commercial use” and does not allow individuals to live within the boundaries of the property. Individuals who get caught dwelling within a commercial property where it is not allowed may be liable to pay certain fines in connection with the law.
What Does “Zoning” Mean?
Every state & city within the U.S. is divided into sections that dictate what type of properties can be built/exist within their boundaries. The main types of zoning include:
- Residential – For neighborhoods where the buildings will be used by residents to live in, e.g. single-family homes and multi-family structures.
- Recreational – Land used for recreational activities, e.g. parks, campgrounds, botanical gardens, etc.
- Agricultural – Parcels of land used for farming purposes.
- Commercial – Areas designated for certain types of commercial properties that will provide products and services to the community, e.g. retail and office space.
- Industrial – For commercial businesses that specialize in the manufacturing of products, e.g. factories and warehouses.
Even though there is a category specifically referred to as “commercial zoning”, certain types of commercial properties can fall under other categories as well. Individuals looking to acquire commercial space should research their local laws in regard to the zoning that applies to their business.
State-Specific Leases
Each state has its own rules for commercial leases, so it’s important to use a lease agreement that matches your state’s laws. A state-specific template makes sure you include the right details, follow local rules, and keep both the landlord and tenant protected. Many providers offer downloadable templates for various states, including Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. While the provided sources list U.S. states, the principle is equally important in the UK, where local planning authorities and the Landlord and Tenant Act 1954 (for business tenancies in England and Wales) create specific legal frameworks that must be adhered to.
Specialised Commercial Lease Types
Beyond standard office, retail, and industrial leases, there are specialised forms for specific commercial arrangements.
Commercial Sublease Agreement
A register presented as a source to transcribe the particulars of a lease where a tenant wishes to transfer their rights to occupy the premises to a subtenant. This is a critical document, as it typically requires the original landlord’s consent and clarifies the responsibilities of all three parties: the original tenant (sublessor), the new tenant (sublessee), and the landlord.
Booth (Salon) Rental Agreement
A form used to document the renting of a small space within a larger commercial property, specifically used for those carrying out services related to the massage and cosmetology fields. This type of agreement is common in beauty salons and spas.
Booth (Massage) Rental Agreement
Allows the lessor, usually the proprietor of a business that offers massage services, to lease a portion of a larger property to the lessee who will be using the area to conduct therapeutic services for a fee.
Garage (Parking) Rental Agreement
A consolidated outline of the rights and expectations associated with the rental of a parking space to store a vehicle. This is often used for businesses needing dedicated parking for employees or clients.
Facility Event Space Rental Agreement
Assigned paperwork that transcribes the pertinent details for hiring out a space for a specific event, such as a conference, wedding, or party.
Practical Steps for Finalising a Lease
Once the details have been transferred to the contract, the participating individuals should offer the following in the presence of a notary public: - Date of the Document’s Execution - Lessee’s Signature - Lessor’s Signature
Upon the above actions being completed, the agent possessing notarial powers shall complete the two (2) designated sections (one (1) for the lessor and one (1) for the lessee). This process, while described in a U.S. context, underscores the importance of formal execution. In the UK, while notarisation is less common for standard commercial leases, the document must still be properly signed, witnessed, and executed according to the Law of Property (Miscellaneous Provisions) Act 1989 to be legally enforceable.
Financial and Space Considerations
Usable vs. Rentable Square Feet
When determining a commercial property’s annual or monthly rent, the square footage of the available space plays a major role in calculating the sum of the payments. The concept of usable versus rentable square feet is fundamental. Usable square footage refers to the actual space the tenant occupies and uses exclusively. Rentable square footage includes the usable space plus a portion of the building’s common areas (e.g., lobbies, hallways, restrooms, elevators). The difference is expressed as a load factor. Tenants must understand this distinction, as rent is typically calculated on the rentable area, which can be significantly larger than the usable area. This is a key point of negotiation in commercial leases.
The Importance of Professional Advice
While free templates and sample agreements provide a valuable starting point and educational resource, they are not a substitute for professional legal advice. Commercial property law is complex and varies significantly by jurisdiction. Engaging a solicitor or commercial property lawyer is strongly recommended to ensure the lease is tailored to the specific business needs, complies with all relevant laws, and adequately protects the tenant's or landlord's interests. A professional can also help negotiate terms, review clauses related to rent reviews, service charges, repair obligations, and break clauses.
Conclusion
Understanding the structure, types, and key components of a commercial lease agreement is essential for any business or individual involved in renting commercial property. From the basic elements of a gross lease to specialised agreements for booth rentals and event spaces, the correct documentation is fundamental for a clear, fair, and legally sound tenancy. Key considerations include the type of lease, specific clauses for compliance and safety, state-specific legal requirements, and the distinction between usable and rentable space. Always prioritise a written agreement, carefully review all terms, and seek professional legal counsel to navigate the complexities of commercial leasing effectively.