“What To Know About Commercial Lease Agreement”
What makes a commercial lease agreement different from other lease agreements?
A commercial lease agreement contains terms and clauses that you don’t usually see on a residential agreement.
That’s because commercial tenants have different needs from residential tenants.
After all, a commercial tenant’s purpose for renting a property is to use it for business purposes. His aim isn’t to live in it — and in some states, it would even be illegal for him to live in it if he took it under a commercial lease agreement.
On the other hand, a residential tenant’s chief purpose for renting a property is to use it as a home.
Given these differing purposes, the contracts binding them to the lease necessarily differ.
This means property managers who’ve only ever made residential lease agreements may not know what to put in a commercial lease agreement.
In this blog post, I’ll talk about what you need to know about a commercial lease agreement. This will give you an idea on how commercial lease agreement can help you benefit from a tenancy.
Understanding a Commercial Lease Agreement
Property managers need to know what makes a commercial lease agreement different from other agreements.
In this way, they can add the right terms and clauses for the upcoming tenancy before they ask a tenant to sign the lease.
A lease agreement for a commercial property isn’t the same as the ones for a residential property, as I said earlier. I’ll discuss that part in greater depth in a bit.
But first, let’s talk about what a commercial lease agreement is.
What Is a Commercial Lease Agreement?
A commercial lease agreement is a contract between the property manager and the tenant.
It gives the tenant the right to use a commercial property for a specific period of time. It’s also a document of the important information regarding the tenancy.
Unlike residential leases, commercial lease agreements are fairly complicated. Their terms and clauses are not pre-made.
The content of a commercial lease agreement is also usually discussed extensively by all concerned parties prior to the signing of the lease.
Both parties negotiate the terms of the agreement, including the rights and responsibilities. This is done to ensure that both parties will benefit from the upcoming tenancy.
Things That Make a Commercial Lease Agreement Different
A commercial lease agreement is different from a residential lease agreement, as I said before. Its terms are generally more negotiable…
And in fact, lease agreements of this type are usually made only after a great deal of negotiation between the tenant and manager.
Likely because of that, the terms of a commercial lease agreement vary greatly from lease to lease.
Usually, property managers add clauses that are beneficial to the growth of the tenant’s business in the commercial property.
Terms and clauses regarding parking space, amenities, and security are often discussed before finalizing the agreement.
These tend to be very important considerations in the case of commercial tenants.
After all, these have to consider providing them to more than a few persons, depending on the size of their company.
Parking space for a residential tenant is necessarily smaller than parking space for a commercial tenant or company, for example.
Aside from the negotiated terms and clauses, here are the other things that make a commercial lease agreement different from your typical residential lease agreement.
Not Based on Standard Forms
Many commercial leases aren’t based on standard forms or agreements. A commercial lease agreement is usually made based on what the property manager and tenant have agreed.
The tenant and property manager can demand fewer or more restrictions. They can make the agreement the best fit for the upcoming tenancy.
Made for Long-Term Tenancy
A tenant can’t change or break a commercial lease agreement easily because it’s a contract that’s meant for long-term tenancy. Usually, a lease agreement lasts up to 12 months or more.
A long-term tenancy gives several advantages to the property manager and the tenant.
For the property manager, a commercial lease agreement can provide steady cash flow for a long duration.
On the other hand, the tenant will save money by not having to frequently move to a new property.
More Flexible and Negotiable
In a commercial lease agreement, the property manager thoroughly discusses the terms to include in the agreement with the tenant.
Generally, this negotiation takes place prior to the signing of the contract.
With the flexibility of the agreement, both parties are assured that they’ll benefit from the tenancy.
Clauses are sometimes added to allow the tenant’s business to gain an advantage over other, similar businesses in the area.
This is usually done to encourage the tenant to stay longer in the property.
If done right, the tenant will take on a longer commercial lease agreement and this will provide the property manager a steady source of profit.
Important Terms In a Commercial Lease Agreement
To get the most from a commercial lease agreement, you should include all the important terms.
Covering all the necessary terms of the agreement will lessen misunderstandings between parties.
Consider adding the following terms to make the lease agreement fit the business of the tenant.
1) Details About Rent Amount
All lease agreements should include details regarding rent such as the amount and mode of payment. You should also include the consequences of late payments if there are any.
While setting the amount of rent, make sure that it’s reasonable. Usually, the base rent depends on the square footage of the leased space.
Payments for utilities and other expenses are added to the base rent to get the monthly rental rate.
Sometimes, commercial properties also pass other finance-related responsibilities to tenants.
With that said, it’s important that you negotiate which party is responsible for other costs such as these:
- Property taxes,
- Insurance, and
2) Reasons for Rent Increases
A rent increase usually happens if there are upcoming improvements or maintenance on the property. Also, property managers increase rent to keep up with the market.
To avoid misunderstandings, most commercial lease state the reasons for a rent increase.
Property managers usually add this to the agreement, especially if there’s an annual percentage-based rent increase.
Make sure to negotiate the amount of the percentage increase with the tenant before including it in the agreement. This will prevent disputes during the tenancy.
3) Information About Security Deposit
Aside from rent, lease agreements also include details about the security deposit. It’s important to state how it’s going to be used and under what conditions it will be returned.
Sometimes, if the tenant breaks the lease, the property manager keeps the security deposit.
4) Length of the Tenancy
It’s essential for a commercial lease agreement to state the length of the tenancy. Doing this can help you in shaping the outcome of the tenancy.
You can gain more profit if the tenant chooses to sign for a longer lease. Many property managers prefer long-term leases because it gives them a steady flow of income, as I said earlier.
However, business tenants often want the opposite.
To encourage the tenant to lease longer, negotiate carefully the length of the lease. Consider giving them incentives to encourage them to renew the contract.
5) Allowed Alterations to the Property
A commercial lease agreement should address what improvements or modifications can be made to the property.
Commercial properties often have this clause because many commercial tenants want to customize rental spaces to suit their purposes.
If alterations are allowed, specify who’ll pay for it and who’ll be responsible for returning the property to its original condition.
Require the tenant to ask for permission first before they start making alterations.
6) Use and Exclusivity Clause
Many lease agreements have a use clause to state the activity the tenant can do in their rented space.
This clause is needed to ensure the safety of the tenants and their customers.
It’s also added to the lease agreement to further protect the property from damage and limit the liability of the property owner.
An exclusivity clause is also included in a commercial lease agreement.
This clause is often used for business purposes. It’ll prevent the property manager from renting space to a tenant’s competitor.
Get Help from Rental Lawyers
Rental laws are complex and violating them will result in major legal consequences. It can negatively affect the rental property business.
Before finalizing a commercial lease agreement, let a rental lawyer review the lease to help you avoid violating rental laws.
Final Thoughts on What to Know About Commercial Lease Agreement
In this blog post, I talked about what you should know about in a commercial lease agreement. Before a new tenant moves into the commercial property, they need to sign a lease agreement of that type first.
The commercial lease agreement contains all of the important information about the tenancy.
Its structure is not based on standard agreements. The terms and clauses of this agreement are usually negotiated between both parties prior to its finalization.
Having a written lease agreement can be an advantage for you and your tenant. Just make sure to include the terms that I discussed in this blog.
If you have more questions regarding a commercial lease agreement, leave them in the comment section below.
Disclaimer: This commentary is a matter of opinion provided for general information purposes only and is not intended to be taken as investment or trading advice under any circumstances. Information and analysis above are derived from sources and utilizing methods believed to be reliable, but we cannot accept responsibility for any losses any person may incur as a result of this analysis. Individuals should consult with their personal financial advisers. By using this web site or any information contained in it, the user specifically and expressly agrees that no advisor-client relationship is created between said user and any author, owner, executive, or principal of this web site by either use of this web site, or by any information, product, or service offered by or on this web site. No express or implied guarantees or warranties as to investment or trading results are made, and any perceived insinuations of such are hereby expressly disclaimed.