Demystifying Commercial Lease Agreements: What You Need to Know

Demystifying Commercial Lease Agreements: What You Need to Know

In 2018, there were 5.9 million commercial buildings with 97 billion square feet of floor space in the United States. Despite this, commercial lease agreements aren't standardized and can vary greatly among landlords and properties.

Whether you'll be leasing a space for your business or you're looking for a tenant for your building, it's important to understand lease agreements. A commercial lease will outline expectations and requirements. It will help prevent major headaches later on down the road.

In this guide, we'll tell you what you need to know about commercial lease agreements.

What Is a Commercial Lease?

A commercial lease agreement is a legally binding document that allows a landlord to set terms with a tenant. The commercial lease will give the tenant various rights and will outline all of the obligations that the tenant and landlord will need to adhere to.

Lease agreements vary and each includes different information. Generally, a commercial lease will outline terms that relate to expenses, taxes, security deposits, and the cost of construction and repairs at the property.

Setting expectations clearly with a lease agreement can help landlords and tenants avoid legal issues. Doing so is essential when leasing and managing a commercial property. There are several main types of commercial lease agreements. Here's what you should know about them.

Net Lease

With a net lease, a tenant will need to pay the base rent as well as utilities and other expenses such as insurance, maintenance, and property taxes.

The specific expenses a tenant pays outside of the base rent will vary based on the specific commercial lease terms. It will vary whether a single net, double net, or triple net lease agreement is used.

Gross Lease

With a full-service gross lease, a tenant will pay a fixed amount for rent each month and the owner will cover everything else.

With a modified gross lease, a tenant will pay for all of the same things as they would in a full-service lease. However, they'll also split the costs of utilities and additional costs with a commercial landlord as well.

Percentage Lease

With a percentage lease, a tenant will pay a base rent. However, they'll also give a percentage of their business's gross income to the landlord as well.

This percentage will be agreed on during the negotiation process and will be outlined in the commercial lease agreement.

Commercial vs. Residential Leases

Generally speaking, commercial leases will include fewer protections for a tenant. For this reason, it's important that businesses and landlords carefully consider the terms of a lease agreement. All the terms should be set perfectly from the very beginning.

Another major way that commercial leases differ from residential lease agreements is how they outline requirements for maintenance and repairs. When it comes to commercial leases, this can vary quite a bit.

With a full-service lease, for example, a flat fee will include the rent and all expenses for a property. However, many other types of leases will require the tenant to reimburse the landlord or pay for maintenance expenses on their own.

Understanding Commercial Lease Agreements

Understanding commercial lease agreements is essential when renting a property or when leasing a property to a tenant. Net leases, gross leases, and commercial lease agreements are all different, so each landlord will need to decide what the best choice will be for their relationship with a tenant.

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