Get to Know Typical Commercial Lease Terms
Written by: Alan Nochumson
When entering into a new commercial lease agreement for your business, many different factors can influence the decision-making process. From obvious financial factors to slightly more esoteric considerations like space layout and functionality, a commercial lease is capable of shaping the direction and success of your company. Commercial leases tend to be more complex than residential leases, so it is important to carefully research the terms of a commercial lease before signing. Because leasing commercial space is often the largest expense for a business, understanding the risks and benefits of various types of commercial leases is extremely important. Being familiar with typical commercial lease terms and clauses can help make the process less stressful.
Types of Commercial Leases
With so many different types of businesses and industries looking for commercial space, there are also a variety of commercial lease agreements to choose from. At first glance they may seem to be very similar, however, it is important to fully grasp the sometimes subtle variances between the different types. While certain financial and property-related responsibilities could fall to either the landlord or tenant depending on the agreement, it is important for a business owner to identify which agreement will best serve their business going forward. Below are the 4 most typical commercial lease agreements:
- Single Net Leases: In a single net lease, the tenant pays only for rent and property taxes. The landlord is responsible for insurance, maintenance, repairs, etc.
- Double Net Leases: In addition to rent and property taxes, the tenant is also responsible for utilities and insurance. With this lease, landlords remain responsible for maintenance and any repairs.
- Triple Net Leases: One of the most common agreements, a triple net lease calls for all financial responsibilities to fall to the tenants. The landlord remains responsible for all repairs to the building.
- Full-Service Gross Lease: Also referred to as a modified net lease, with this agreement, tenants and landlords split structural repair costs as well as operating expenses.
Know Your Clauses
One of the most important, and often overlooked, aspects of typical commercial lease terms are the clauses they contain. While it is always recommended to have an attorney review the agreement for such an important decision, having a basic understanding of the clauses involved can be the difference between a space and an agreement that suits your particular needs well and one that can quickly become claustrophobic, constraining, and expensive. Below are three of the most common clauses that you should know:
- Use Clause: A use clause defines how a tenant will be allowed to use the leased space. Having in writing these terms allow the renter to have clear stipulations on what one can and cannot do with the leased space.
- Rent Clause: A rent clause can include details other than the amount of the agreed-upon rent. For example, automatic rent increase mechanisms could be included within a rent clause that could significantly impact your financials over the course of the lease.
- Term Clause: A termination clause in your agreement defines the length of your lease and specifies the commencement date, expiration date, and sometimes any renewal options as well. Before signing, it’s in your best interest to take a realistic look down the road to determine the viability of the space in the future relative to your expected growth.
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