Commercial Leases
A commercial lease is an agreement for the rental of commercial property. Commercial property is any property that is located in an area that is zoned for commercial use. Commercial property typically may only be used for commercial (work) purposes and not for residential or other purposes.
Commercial vs. Residential Leases
Commercial leases are similar to residential rent leases in that the property owner or the "landlord" allows a "tenant" to rent the property in exchange for rent money. The terms of the lease are contained in the lease agreement which specifies items such as the amount of rent and the duration of the lease.
Commercial leases are very different from residential leases in many respects. First of all, as mentioned, the premises may only be used for business purposes, and the terms in the lease agreement will usually reflect this.
They also differ from residential leases in that they tend to be for a longer duration than residential leases. Tenants (which are usually business people or merchants) will also have various expenses and costs, and may have to install fixtures. This can lead to more restrictions on the use of the property. A commercial lease is generally more formal and more difficult to get out of than a residential one.
Provisions and Terms Contained in the Commercial Lease
The lease is the main point of interaction between the commercial landlord and tenant. At the very least, a commercial lease needs to contain the following basic information:
- Names of all parties to the agreement, including the landlord and all tenants
- Description of the property being leased. The property needs to be identifiable in the lease in order for the agreement to be valid and enforceable. Street names and addresses are preferred over descriptions.
- Amount of rent to be paid. Also included should be whether the rent is to be paid by month, and also a forecast of possible rent increases.
- Duration of the lease, called the "term" of the lease period. Also state whether the lease is renewable after the term expires.
Additional Lease Terms
The above terms will make the lease valid and enforceable if signed and documented. Landlords and tenants may also wish to address the following provisions in negotiating the lease:
- Whether a security deposit is required or desired and how much it will be
- Whether any modifications or alterations to the properties will be allowed and if so, what limitations there are on the modifications
- Agreements regarding fixtures. This is important, since many businesses need equipment to be installed. For example, restaurants must often install various appliances.
- Whether or not the lease may be subject to assignment or sublease
- Any additional costs or expenses involved
- Terms which provide for the resolution of disputes over lease terms. For example, agreements to hire a mediator in the event of a dispute
The more specific and detailed you are in the lease agreement, the better it is in the long run. Be sure to know exactly what you want, and be able to anticipate changes in the future.
Provisions that May Not be Included in the Lease
Pursuant to Federal law, landlords are prohibited from including certain provisions in any commercial lease agreements:
- Provisions that discriminate against tenants on the basis of race, sex, age, national origin, or religion
- Neither landlord nor tenant may alter the property in such a way that makes it inaccessible to the handicap if the premises will be used publicly (most businesses are for public use)
- Provisions may not limit or expand the rights of either party beyond the bounds determined by state and federal law
Drawbacks and Benefits of Commercial Leases
Commercial leases can present a risk because commercial zoning is different in every city and county. Zoning laws are also subject to frequent changes, and the lease should be flexible enough to anticipate such changes.
Commercial leases tend to offer less consumer protections for tenants, because there is no such thing as a standard lease agreement for commercial property. Make sure your commercial lease is in writing and contains the specific provisions unique to your business.
However, commercial leases are beneficial because they can save the business owner money by allowing them to rent rather than purchase an entire property. For some business owners, leasing may be the only financial option available to them. Also, landlords retain responsibility over certain duties regarding the land, such as maintenance and repairs. Finally, commercial leasing presents more opportunities to find ideal business locations.
Points to Remember
Whether you are a landlord or a potential tenant, commercial leases must be very specific since they deal with a business use rather than personal, residential use. Consider the following in negotiating a lease:
- Failure to include basic information in the lease might invalidate the lease agreement. Be sure all information is identifiable
- Be specific and creative in tailoring the lease agreement to your business needs. For example, if you have a seasonal business, will you be needing the property for the entire year?
- Be able to project future decisions and anticipate zoning changes
- Make sure nothing in the lease makes it illegal or subject to legal action