Commercial Lease Agreement

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Commercial Lease Agreement

A Brief Introduction About the Commercial Lease Agreement

There are differences between a commercial lease and a residential lease, like the lessee in the former case is a business organization.

You need to understand that a commercial lease agreement, when compared to a residential lease agreement, offers:

  • Less legal protection: It is presumed that a business organization know the law better than an individual
  • No standard template: The lessor cannot use a standard template as because each organization has different requirements
  • Greater scope for negotiation: The terms of the lease like rent amount, tenure of the lease are subject to change
  • Longer tenures: The tenure of commercial leases are greater than a year

The typical commercial lease terms are as under:

  • Rent amount: It is usually calculated on the basis of square feet
  • Rent increases: There is an annual rent increase
  • Security deposit: Amount and date on which it is to be returned
  • Duration of lease: A short term lease is better for a new business
  • Modifications: The party responsible for the modification
  • Property Description: The detailed description of the apartment and parking facility
  • Signs: There should be permission for placing signs to get better visibility from the street

Who Takes the Commercial Lease Agreement? – People Involved

There are two parties involved in a commercial lease for real estate, the landlord and the tenant.

The tenant or lessee is a business organization, and the reason for leasing the property versus buying it is less capital needs to be invested. Unlike residential leases, commercial leases vary from the lessee to lessee.

The landlord is the lessor who owns the property and wants to get a suitable return on investment. The landlord enters into this agreement so that there are regular returns from the asset along with incremental returns every year. However, the landlord cannot lease an apartment in the complex to companies in the same business.

Purpose of the Commercial Lease Agreement – Why Do You Need It?

The purpose of having a commercial lease agreement is to protect the interest of the lessor and the lessee.

If you have a commercial space for lease, having an agreement will help you in the following ways:

  • Rent calculation: The rent in case of a commercial lease is usually based on the area of the property measured in square feet. Care should be taken to see if the elevator and interior walls are included in the calculation or not. You can find out how to calculate commercial rent online.
  • Annual increment: It will be possible to increase the rental annually
  • Use clause: The tenant cannot engage in any activity not mentioned in the agreement. This ensures that the landlord is protected from any damage to the property and has limited liability
  • Subletting: The tenant can sublet the space if the business fails or relocates. This will ensure that there is no default on the part of the lessee
  • Exclusivity clause: The lessor cannot lease an apartment in the commercial complex to a competitor of the lessee
  • ADA compliance: Space should be accessible by disabled people as mandated by the Americans with Disabilities Act.

The lessor does not have to worry about default in payments, and the lessee can conduct business for the duration of the lease

Contents of the Commercial Lease Agreement – Inclusions

A commercial lease agreement is entered into by the owner of the property or lessor and an organization or lessee, so the names of the parties to the agreement must be included.

Apart from this, the following information should be included in such agreements:

  • The effective date of the agreement: The date from which the agreement is valid
  • Term of the lease: The start and the end date of the lease, as well as options for renewal
  • Computation of rent: As commercial leases are for more than a year, the yearly rental payable month-wise should be mentioned
  • Security deposit: The amount of security deposit and when the same will be refunded
  • Taxes: The personal property taxes of the tenant and real estate taxes payable by the tenant
  • Governing law: In the event of  litigation, the laws of the state will hold good
  • Fixtures: Any furniture or equipment used by the tenant during the term of the lease shall remain the property of the lessee and can be removed at any time by the lessee
  • Subletting: The tenant shall have the right to sublet any portion of the premises provided there has been no breach of contract
  • Loss and damage: The lessor will not be liable for any loss or damage to the leased property except where there has been willful damage by the lessor
  • Signage: The lessee will have the right to install any exterior or interior sign in accordance with the laws of the state
  • Use: The tenant can use the property solely for the purpose mentioned in the agreement

[Also Read: Sublet Agreement]

How to Draft the Commercial Lease Agreement?

While drafting a commercial lease agreement, the following points need to be kept in mind:

  • Parties involved: The names of the parties to the agreement and the relationship between them
  • Rent payable: The monthly rent payable and the period it relates to, including penalties for delayed payment. The calculation of rent is usually based on the area of the property in square feet. The agreement should clearly state if the elevator and interior walls are included while calculating the area
  • Improvements: Tenant shall obtain the required licenses and ensure that the contracts are completed in a professional manner. The permissible improvements should be stated clearly in the agreement
  • Repairs: The obligation for repairs of the landlord and tenant should be separately stated
  • Indemnity: The tenant needs to maintain public liability insurance and indemnify the landlord for any damage to property or employees while on the leased premises
  • Term of the lease: The start and end date of the lease
  • Applicable laws: The laws of the state applicable to the agreement
  • The effective date of the agreement
  • Description of the property: The facilities being provided along with the property should also be mentioned
  • Signs: The agreement should allow setting up signs for promoting the business.

Negotiation Strategy

In a commercial lease agreement, the owner of the property or lessor leases the property to a lessee for a specified tenure and lease rental. Both parties to the agreement should negotiate the rent, the tenure of the agreement, and the other clauses like payment of utilities so that there are no disputes in the future.

Benefits & Drawbacks of the Commercial Lease Agreement

The benefits of having a commercial lease agreement are:

  • The interest of both the lessor and the lessee is protected. The lessee has a steady flow of income with an annual increment. The tenant can use the leased space and generate revenues from it as long as the lease payments are made within the due date. The lessor does not have to worry about damages to the property during the tenure of the lease as these are the responsibility of the lessee. The lessor cannot rent an apartment in the same complex as a competitor of the lessee.
  • Sharing of costs: The costs related to the property like property taxes, utilities and repairs are shared according to the proportion mentioned in the agreement
  • Subletting: The lessee can sublet the property if the business is not doing well or if they are relocating

The drawbacks of having a commercial lease agreement are:

  • Loss of opportunities: The lessor cannot terminate the lease agreement prematurely to take advantage of a better lease rental offered by another prospective lessee unless there is a breach of any clause by the lessee
  • A ceiling on lease: Some tenants may insist on a ceiling on the rent increase, reducing returns for the landlord

What Happens in Case of Violation?

A commercial lease agreement is a legal contract between the lessor and the lessee.

The lessor is the owner of a property and wants to rent out the property to an organization, not an individual. The organization will be using the leased property for the purpose of generating revenue.

The lessor has assured a rent, which increases on a yearly basis. and the lessee is able to use the property for the tenure of the lease. If the lessee violates any clause of the agreement, then the lessor can not only prematurely terminate the agreement but also recover charges for the damages caused by the lessee, including legal costs.

The lessee can also take legal action of the court for non-fulfillment of any clause in the agreement, and any charges borne by the lessee, in this case, will have to be compensated by the lessor.

The lease agreement is prepared in accordance with the laws of the state in which the property is located. If the parties violate any clause in the agreement, then as per law, the agreement will be null and void.

You can refer to a sample commercial lease agreement in pdf online for drafting an agreement.

A commercial lease agreement is an agreement between the lessor or owner of the property and lessee or the business organization. Commercial leases, unlike residential leases, are for longer periods, and there is no standard template for such leases. The agreement differs according to different There is a clause for an increase in the lease rental on an annual basis.

There are different commercial lease types like absolute net lease, triple net lease, modified gross lease(1), and full-service lease. These leases differ in terms of the expenses and taxes payable by the tenant.

However, like any commercial lease agreement, both parties should negotiate the terms and conditions before entering into the agreement(2).

The agreement protects the interests of both the lessor and the lessee. The lessor has a regular income with an annual increment. The lessee can use the property on a commercial basis to generate revenues provided the intended use clause is not violated.