Commercial Property Lease Agreement

What is a commercial lease agreement?

A commercial lease is a type of rental contract by virtue of which a landlord rents out a property to a tenant, and the tenant undertakes to pay rent in turn. This type of legal document is widely used between legal entities and organizations. This Agreement applies to various types of commercial real estate, including

• Buildings and their parts;
• Office spaces;
• Retail and Hospitality;
• Warehouses; and
• Industrial properties and so on.

The parties to a commercial lease agreement are a landlord and a tenant. A landlord is an owner of commercial real estate. If there is a co-ownership over a real estate, in that case both owners become landlords and should sign the original lease agreement. There could be one or several tenants under a lease agreement as well. If a building or commercial premises are planned to be used jointly by tenants, in that case they have to sign a lease together.

A Commercial Lease Agreement should not be confused with a residential lease. A residential lease agreement is used by tenants who wish to rent out a residential space for living. As a general rule, residential leases enjoy robust regulation at the federal and state levels. This is so because a tenant’s position in a residential lease is considered weaker by default. Contrary to that, a commercial lease allows landlords and tenants to decide the conditions of their lease freely. In other words, parties to a commercial lease are free to include any conditions and provisions in their lease contracts.

What Is an Example of Commercial Lease Agreement?

There are lots of daily situations why you may need to have a proper commercial lease template:

1. Start a Business: Robert dreams to open his first bar in a city. He has a limited budget and cannot afford to buy a brand-new premises. There is, however, an empty commercial space in a city’s downtown that belongs to Patrick. Robert decides to contact Patrick and negotiate with him the conditions of a future commercial lease agreement contract. A few months after Robert and Patrick sign their lease agreement.
2. Expand a Business: Emma and Luna are business partners and run a small chain of coffee shops in their hometown. They are currently exploring ways to grow their business. One of the suggestions is to open a new coffee shop in a neighboring town. Emma and Luna are not sure if the idea is a success, as a neighborhood town has lots of similar businesses. Nevertheless, they want to try. They try to contact a few owners of retail premises in a neighborhood town to discuss conditions of commercial space lease agreements.
3. Get Additional Income: John inherited an industrial warehouse in a city’s suburbs. He does not plan to start any business, nor does he want to sell a warehouse. He thinks to rent out a warehouse to this friend, who has a delivery company. They meet together to discuss the future commercial lease agreement and payment terms.

Lease Agreement Format—How to Write a Simple Commercial Lease Agreement?

The general rule to keep in mind is that every commercial lease agreement is different. Everything depends on the parties’ preferences when it comes to a type of property, rent payment terms, duration of the lease, and many more.

What Should Be Included in a Commercial Lease Agreement Contract?

A commercial lease agreement has to contain a number of essential elements to become legally valid and enforceable:

PARTIES DETAILS

Essential tip No. 1 for all future tenants is to know who your landlord is. You have to make sure that a person who signs a commercial space lease agreement with you is a real owner.
Always ask for a title deed or other documents proving a landlord’s ownership. If a landlord is not a real owner of a commercial property, they cannot transfer you a right to rent such a property. As a result, your commercial lease agreement is not legally binding.

It is a common situation, when a landlord is represented by a property management company. In that case, ask for a copy of a signed agreement between an original landlord and a property management company. This will help you to see the whole picture.

Details of landlords and tenants should include their full names and addresses. It is also vital to provide contact details so that parties can contact each other instantly.

DESCRIPTION OF A LEASED PROPERTY

A leased property should be described in detail in the text of a lease agreement. Parties have to include as many details as possible. This is done to make sure that a tenant gets exactly the same property as they need.

A commercial rental agreement template should include:

• full address of a property;
• a property’s size;
• a detailed description of a real estate, including all additional premises;
• a detailed description of internal furnishings and interior (if applicable).

SECURITY DEPOSIT

A security deposit is a sum of money used by a landlord as a guarantee against unpaid rent, possible damages to a leased property, and other defaults. A security deposit amounts to one or a few months of lease payments. A security deposit should be returned at the end of a lease agreement, provided a tenant fulfills their obligations fully.

Most commercial rental agreement templates have a deposit clause. Having a deposit is a good business practice; however, the law does not oblige doing so.

Usually a tenant pays a security deposit on the date of signing a commercial lease or within the first month.

LEASE PAYMENTS

Another mandatory element for a commercial lease agreement template is the amount of rent payments. They could be defined in various ways, for example:

• fixed periodical payments (e.g., monthly, quarterly, or annual);
• a fixed % from a tenant’s monthly profit;
• fixed periodical payments + a % from a tenant’s monthly profit; or
• other type of lease payment arrangement.

The most common type of lease payment structure is periodical payments. A commercial lease agreement should include the exact date of a month, quarter, or year on which a payment should be made.

For a lease payment in the form of a fixed percentage of a tenant’s monthly profit, a tenant should think carefully about the following. Firstly, what happens if there is no profit and a tenant defaults on payment? Usually, a landlord may need to present certain financial evidence from previous tenants, proving that a minimum profit threshold could be met. Secondly, parties need to clarify from which exact profit a percentage should be paid—from a turnover or a profit (gross or net).

Other lease payment arrangements may include proportional increases of rental payments depending on a business’s performance.

DURATION OF COMMERCIAL LEASE

Another mandatory clause for a commercial property lease template is its duration. A commercial lease is usually concluded for at least 6 months and can last up to several years. The exact duration depends on the parties’ business goals and the future profitability of a business.

A start date of a commercial lease and the date of signing a contract are different in time. In rare cases a commercial lease starts on the same date as a document is signed by the parties. Usually, a lot of preparatory work might be required before a new tenant can move in—e.g., to clean premises or evict previous tenants.

OBLIGATIONS OF THE PARTIES

Every commercial lease template should state the list of parties’ duties and obligations. At first sight it may appear that this part does not require clarifications. Though practice shows what is not agreed on paper does not exist.

As a rule of thumb, a tenant is responsible for:

• paying rent on time;
• using a real estate according to the agreed purpose;
• avoid structural modification of leased premises;
• maintaining in due order leased property.

On the other hand, a landlord is responsible for:

• providing access to a leased property;
• making necessary repairs, if requested;
• Do not further sublease real estate.

The more extensive list of duties a commercial lease template has, the more secure business relationships parties will have in the future.

SIGNATURES

Once a business lease contract template is finalized, it is time to sign it. If either of the parties is an individual, they have to sign a contract in person. If a party is a business entity or organization, their representative should sign a document. A representative could be an individual who has a right to sign by virtue of the company’s bylaws or power of attorney.

Which things to consider before signing a commercial real estate lease agreement?

Most commercial lease agreement templates have common mistakes, which may lead to a dispute or litigation between the parties. They are:

Who Pays Property Taxes?

A property tax is a mandatory annual tax that is paid on real estate by its owner. Usually, for a short-term business lease contract, a property tax is paid by a landlord. However, who should pay a tax if a property is leased out for a longer period of time?

A commercial rental property lease agreement can provide the following options:

• A full property tax is paid by a landlord;
• A full property tax is paid by a tenant;
• A property tax is split between the parties (50/50 or any other combination).

Who Pays Utilities?

Think in advance about additional services a rented real estate has. Do you have garbage collection in your neighborhood? Does your property have water, sewage, or electricity? Are there any local council taxes involved? All this should be considered carefully by the parties before entering into a commercial lease agreement.

Parties may decide to split those costs in a different way.

How to Resolve a Dispute?

When parties enter a commercial lease agreement, they hope that there won’t be any disputes. However, having a good dispute resolution clause is a must.

A dispute resolution clause helps to clarify:

• How the dispute should be resolved—by mediator, arbitrator, or both;
• Who pays attorney’s fees once a dispute is brought to a court;
• Which state’s court should have the right to hear this case?

Subletting is allowed?

If a tenant rents out a whole commercial building, they may further wish to rent out parts of it to a third party. Almost every business lease agreement template should clarify rules regarding subletting. The rules could be the following:

• Subletting is allowed to a third party;
• Subletting is completely prohibited;
• Subletting is allowed upon receipt of written consent from a landlord.

Parties should decide what happens if a tenant defaults. In other words, what should be the consequences for violating a subletting rule? A landlord may wish to terminate a commercial lease earlier. Another option is to set up a one-off penalty a tenant pays in case of a violation.

What about lease renewal?

A question of how a lease renews should be addressed in every commercial lease agreement template. Most commercial lease agreements provide an automatic renewal clause. This clause allows you to prolong a lease at the end of the term for the same duration. At the same time, parties may decide to make a prolonged period longer or shorter.

Another question that should be considered is a rent payment increase. Do the parties wish to keep the rent the same during a prolongation period? If the parties wish to change rent payments, rules on how rent increases should be defined in a contract.

Last but not least. A commercial lease agreement should also provide an exit clause from an automatic renewal. As a general rule, either of the parties should send an advance written notice before the next prolongation date. The period for a written notice should be at least 30 days.

Improvements: Yes or Not?

If a tenant plans to make some leasehold improvements to a property, the parties have to discuss limits for such improvements. Landlords usually tend to restrict major structural changes in a building or leased premises. Firstly, it may affect other tenants’ rights, including nuisance. Secondly, introduced modifications may not be suitable for future tenants.

At the same time, minor improvements and repairs are acceptable. Tenants, for instance, can paint walls and put in their furniture and equipment.

It is also vital to agree in advance if a tenant will receive compensation for the said improvements.

Do I Need a Commercial Rental Property Lease Agreement?

Signing a commercial property lease agreement is a matter of choice, not a rule. There is no federal or state law that obliges parties to enter into a lease agreement.

At the same time, commercial lease agreement templates can help in various ways:

• Predictability: For a tenant, it means having a fixed real estate object they can use to run a business. It guarantees to a tenant that their right to use a leased property is secured for a fixed period of time. For a landlord, it means having regular rent payments and a stable income. On top of that, a landlord can be sure that their real estate is well maintained.
• Legal Protection: Written commercial lease templates strengthen your position if there is a court dispute. Once all the terms of a commercial lease are fixed on paper, it is easier to find out who is wrong and who is right.
• Clear Rules: Having a written lease agreement eliminates ambiguity in relationships between the parties.

Types of Commercial Real Estate Leases

There are lots of types of commercial lease agreements. They all differ depending on a type of rent payment arrangement or exclusivity of a lease itself.

Gross Lease, Single-, Double-, and Triple-Net Leases

A gross lease is a type of commercial lease where a tenant pays only rent payments for usage of real estate. On the other hand, a landlord remains paying property tax, utilities, insurance, and other applicable maintenance expenses.

A single net lease is another type of commercial lease agreement, where a tenant pays a portion of a property tax and utilities on top of regular rent payments.

A double net lease is a type of commercial lease agreement where, along with regular rent payment, a tenant pays a portion of property tax and utilities and full insurance.

A Triple Net Lease is a type of commercial lease agreement where a landlord pays a portion of property tax and insurance, while the rest should be paid by a tenant.

Exclusive vs. Non-Exclusive

A good example of a commercial lease agreement with an exclusive clause could be the following case. Company A runs a chain of pizza restaurants and wants to open a new branch in shopping mall B. Company A insists on including an exclusive clause for a commercial lease disallowing shopping mall B from putting any other pizza restaurant in the same shopping mall B. An exclusivity is essential for this particular case, as the presence of one more competitor can directly affect a company’s profits.

Another situation is a non-exclusive clause. A law firm is looking for office premises in a city downtown. They found a business center that is ready to rent out an office space. There are other similar companies, including a law firm, in the same business center. A law firm B. does not mind if there are other similar law firms in the same building.

What Happens When a Commercial Lease Agreement Expires?

A simple commercial lease agreement comes to an end when there is no automatic prolongation clause. Once the lease expires, the parties have to do the following steps:

• Check Premises: Almost every sample commercial lease agreement gives a landlord a right to investigate premises before a lease expires. The exact date and time of investigation should be agreed together with a tenant. A tenant cannot refuse a landlord to enter premises and investigate them.
• Move Out: On the very last date of a lease, tenants have to move out from a commercial property. In some cases, a commercial lease contract template may provide an additional grace period for tenants. This is usually a week or two during which a tenant should clean all premises and remove any adjustments to make sure a commercial property is being returned in the same condition as on the first date of a lease. If a tenant refuses to move out, a landlord has a right to initiate an eviction process at any time.
• Pay all Debts: A landlord should check carefully if there is any debt for payment of utilities, property taxes, or insurance. If those charges are paid by a landlord, parties can skip this step.
• Return a Deposit: If there is no debt and property is in good condition, a landlord should pay a deposit back. This is a general rule all commercial lease agreement samples have. Parties may also agree to use a deposit towards a last payment.

Get Your Commercial Lease Agreement Template

In order to get a customized contract lease agreement sample, you have to answer a few simple questions. A document can be generated in either Word or PDF format. Once a payment is made, you will receive your customized commercial lease agreement template via email.