When businesses are interested in leasing commercial property such as an office or retail storefront, they’ll typically enter into a commercial lease agreement with the landlord (also known as the lessor). A commercial lease is one of the most important parts of renting commercial property because it outlines the responsibilities of both the landlord and the business tenant (also known as the lessee).
Whether you’re studying for your broker license exam, exploring a switch from residential to commercial real estate, or just curious about how commercial leases work, we’ll explain what you need to know about leasing commercial property.
What information can you find in a commercial lease agreement?
Most commercial lease agreements will, at a minimum, contain the following information:
- Names of the parties (landlord or landlord’s business name, tenant or tenant’s business name) and their contact information
- The property address and a description of the square footage and common areas
- The lease term — when does the lease start and end?
- Use of the property and any restrictions
- Business signs (commercial leases often require tenants to get prior approval of signs, landlords often retain the right to remove signs, and tenants are typically responsible for removing signs and repairing any damage or holes upon lease termination)
- Rules regarding subletting or assigning the lease to another tenant
- The cost of rent and the dates when rent is due
- Who is responsible for taxes, insurance, utilities, maintenance, repairs, etc.
- The renewal term or a renewal option
- Signatures from representatives of both the landlord and tenant
How Do Commercial Leases Differ from Residential Leases?
Commercial and residential leases share some similarities. Commercial leases tend to be more complicated, more customizable, and subject to more negotiations. A residential lease has more laws to protect tenants. This is because it is assumed the landlord has a greater advantage. However, in a commercial lease, where both landlord and tenant are businesses, the assumption is that both parties are negotiating on a level playing field.
Another key difference between commercial and residential leases is that commercial leases are usually much longer than residential leases. Many residential lease agreements are 12 months long, whereas commercial leases are often 3-5 years or more. In some cases, a commercial building lease may also include a buildout, which is a renovation to make the space suitable for a particular tenant. So, let’s say the landlord agrees to do a buildout for a spa, they’ll likely negotiate for a longer lease term to recoup the cost of those renovations.
Common Types of Commercial Lease Agreements
Why is it so important to have a commercial lease agreement in place? As you’ll see here, there are several different types of commercial property leases. Each agreement specifies how the lease is paid, and which party assumes responsibility for certain property-related expenses.
Gross Lease
A gross lease, sometimes known as a full-service lease, is a simple and straightforward type of lease. A business that wants to rent a commercial property with a gross lease agreement will pay the landlord a fixed rental fee. In exchange for that fee, the landlord will pay the property tax bill and the costs of building maintenance, insurance, and utilities. Since the fee is preset, the landlord will have to account for their operating expenses and factor those costs into the gross lease price.
Sometimes, a commercial lease can be a modified gross lease, which means the landlord and tenant agree to a base rent, but the two parties will split certain expenses like property tax, building maintenance, or insurance.
Net Lease
A net lease is one of the most common types of agreements used in commercial property leasing. With a net lease agreement, the tenant pays a fixed rent, in addition to paying for one or more of the following expenses: property taxes, insurance, and maintenance.
Net leases come in three variations: single net leases (N), double net leases (NN), and triple net leases (NNN). Tenants with a triple net lease agreement pay a base rent plus the costs of property taxes, insurance, and maintenance. Double net lessees will pay for two of those three expenses, while single net lessees will pay for one.
Percentage Lease
When leasing commercial property, landlords may agree to a percentage lease. In a percentage lease agreement, the tenant has a base rent cost but agrees to pay the landlord a percentage of their gross revenue. The percentage lease is useful for tenants who want to keep their fixed rent costs down and may be attractive to landlords who believe a business has the potential to increase their sales volume.
Commercial is Complex; Colibri Has the Tools to Help You Thrive
Commercial real estate is a unique specialty. This is why commercial real estate agents earn an average of over $165,000 per year. Mastering commercial real estate transactions can take years. However, for successful commercial real estate agents, the reward is worth the wait. Wherever you are in your real estate career, Colibri Real Estate has flexible learning options to help you unlock your full potential and achieve more.
