Updated: Jul 3, 2019
Are you a business owner looking to rent a brick-and-mortar space for the first time, or an established company hoping to relocate? If you have not already investigated the legal basics of a commercial lease, it is important to take the time to familiarize yourself with the differences between commercial and residential leases, what the basic terms of your agreement can and should include, and whether or not the lease you are planning to sign is the best fit for your business. Many business owners underestimate the importance of their commercial space in relation to their company’s success or failure; in reality, it can be a major factor in determining how well a company thrives and misunderstanding the terms can be costly.
How do commercial and residential leases differ?
The biggest mistake made by those who endeavor to rent a commercial space is to assume that commercial and residential lease terms are more or less interchangeable. In reality, commercial leases are far stricter in their terms, and assuming otherwise may lead to difficulties later down the road. Here are some of the primary differences between leasing a commercial space vs. renting a home or apartment.
Commercial leases are less regulated. In comparison with renting residential spaces, leasing a commercially-zoned building gives the tenant less rights to many expected terms. Privacy regulations (such as the necessity of 24-hour notice prior to a landlord entering the tenant’s space) can go out the window, while timely return of security deposits and the duty to provide necessary repairs or services are not legally guaranteed in many cases, depending on the type of lease signed.
They are more difficult to break. Commercial leases can require lengthier contracts than residential spaces do, often require up-front payment, and the terms usually favor the landlord – although they can be negotiated in advance. Once finalized, however, they are much more difficult to break, amend, or work around than a residential lease – though adding a bailout or co-tenancy clause as a contingency plan during negotiations can help business owners get out of a lease with greater ease.
Terms are more negotiable. This is a positive. There are often several different types of lease and conditions available for a given space, and thus you are generally not forced to accept the terms you are given, unlike with a residential lease; length of your lease, rent, utilities, repairs, insurance, and taxes as well as bailout or co-tenancy clauses and other items can be discussed and amended.
What are the different kinds of commercial lease?
Commercial real estate can be leased under three different types of agreements, called gross, net, and modified gross arrangements. This is where negotiation for the above-mentioned factors will change the ultimate contractual obligations between landlord and tenant.
Gross/Full Service Leases are effectively the highest-coverage leases one can acquire; rent, paid in a lump sum, is “all-inclusive” and covers maintenance, insurance, taxes, janitorial services, and utilities. This type of lease has a simple one payment set up and is much simpler to deal with in the event of property damage or maintenance issues. The payments are predictable but may be higher than with other types of leases.
With Net Leases, the actual charge of rent is lower, and some of the operations, maintenance, and usage fees are covered, but coverage is not as inclusive as with Gross Leases. The “nets” refer to property taxes, insurance, and other maintenance items which can be included in the lease or not. Depending on the extent to which a tenant wants to have these and other expenses covered, they can choose between Single Net Leases (N), Double Net Leases (NN) or Triple Net Leases (NNN).
Modified Gross Leases are a compromise between landlord-friendly Net leases and tenant-friendly Gross Leases. Rent is normally paid in one lump sum and includes the covered “nets” that were agreed to during negotiations, but utilities and cleaning services are usually paid for by the tenant. A perk for the tenant is that if any of the “nets” change during the lease, their lease rate will remain the same; though if those rates decrease, the landlord keeps the extra. This also applies to gross leases.
While this is not a complete list, there are additional aspects of a lease agreement that prospective renters should carefully consider prior to signing for a space. Some of these contract aspects include:
Common area maintenance – how much additional rent will be charged in order to maintain the “common areas” shared by all businesses using the space?
Escalation clauses – commercial leases may come with clauses that allow a landlord to increase future rent, in order to reflect changes in expenses (such as taxes, operating costs, changes to other aspects included
Non-compete clauses – it may be possible to arrange for a landlord to agree not to lease any businesses similar to yours, or in direct competition with you, within the premises.
Subleases – If the space does not work out for your business, are you able to sublet it to another company?
Co-tenancy – If you choose your location based on an “anchor tenant,” i.e. another tenant who lent notable value to the space, does your contract allow you to break your lease in the event that the anchor tenant leaves?
Above all, hire a qualified attorney to help you avoid the minefields in commercial leases and negotiate changes to your advantage. Along with assisting you in finding a space that suits your contract requirements, a lawyer with experience and knowledge in this area of law will be able to help you begin, negotiate, and finalize your agreement. Call the Law Office of Leslie A. Farber for a qualified attorney with years of experience comparing, negotiating, and interpreting real estate transactions on behalf of her clients.