The Commercial Lease: What You Should Know

Know what you're getting yourself into when you rent space for your business.

By , Attorney · Santa Clara University School of Law
Updated by Amanda Hayes, Attorney · University of North Carolina School of Law

Renting commercial space is a big responsibility—the success or failure of your business could ride on certain terms of the lease. Before you approach a landlord, you should understand how commercial leases differ from the more common residential variety. Before you sign anything, make sure you understand and agree with the basic terms of the lease, such as the amount of rent, the length of the lease, and the configuration of the physical space.

Commercial Leases vs. Residential Leases

It's crucial to understand from the get-go that, practically and legally speaking, commercial leases and residential leases are quite different. Here are the main distinctions between them:

  • Fewer consumer protection laws. Commercial leases aren't subject to most consumer protection laws that govern residential leases. For example, there are no caps on security deposits or rules protecting a tenant's privacy.
  • No standard forms. Many commercial leases aren't based on a standard form or agreement; each commercial lease is customized to the landlord's needs. As a result, you need to carefully examine every commercial lease agreement offered to you.
  • Long-term and binding. You can't easily break or change a commercial lease. It's a legally binding contract, and a good deal of money is usually at stake.
  • Negotiability and flexibility. Commercial leases are generally subject to much more negotiation between the business owners and the landlord. Businesses often need special features in their spaces, and landlords are often eager for tenants and willing to extend special offers. (For more information, read our tips on negotiating the best terms of your lease.)

Make Sure the Lease Will Fit Your Business

Before you sign a lease agreement, you should carefully investigate its terms to make sure the lease meets your business's needs.

Rent, Costs, and Length of the Lease

First, consider the amount of rent—make sure you can afford it—and the length of the lease. You probably don't want to tie yourself to a five- or ten-year lease if you can help it; your business could grow faster than you expect or the location might not work out for you. A short-term lease with renewal options is usually safer.

Put a realistic cap on the amount you're prepared to pay. The maximum you're willing to spend should include:

Don't forget to include money you might need to pay upfront for a security deposit or for improvements to fix up the space. Alternatively, you could negotiate for a tenant improvement allowance, meaning the landlord provides you with the funds to customize the space to your specifications.

If you need to find a place right away, you'll have fewer options than if you have the luxury of shopping around until you find the perfect space. Depending on your business needs, you might want the security of a long-term lease (a year or more), especially if you want to minimize improvement costs and build a faithful customer base in a particular location. Or you may prefer the flexibility of a shorter rental agreement (even month-to-month) if you're just testing the waters of your new business and don't want to make a long-term commitment.

Location and Physical Features of the Business Space

After filtering for price, you'll want to narrow down your options depending on location and the physical space.

The physical location of your business is likely to be important to you, your employees, your customers or clients, and your suppliers. For example, if you have an upscale restaurant, you might want to lease space in the theater district or near expensive retail shops. On the other hand, if you run a small consulting business where clients don't visit your office, a particular neighborhood might not be as important as the commute time from your home.

Don't forget to consider the size and physical features of the space. Try to be as precise as possible regarding your minimum and maximum space requirements. If you're moving an existing business because your present rental is too small, you'll probably have a clear idea of how much space you'll need. You'll be less sure if you're starting a brand-new enterprise. Professionals known as "space planners" can help determine how much square footage you need and how to use it.

Be careful about choosing the right square footage for your business. Keep in mind that landlords measure square feet in different ways, and this can result in significant differences in the amount of real or usable space (and the amount of rent you pay). Also, when considering various spaces, be sure to factor in the possibility that your business might need more space in the future—for example, if your hair salon becomes popular and you want to add more services. Also, if downsizing is likely (maybe you plan on outsourcing some of your business functions in the coming years), you don't want to lock yourself into too large a space.

Think about the space's configuration and capacities. In addition to overall size, be clear about your interior needs and the ideal configuration of space you need—for private offices, storage, meeting rooms, restrooms, or a small kitchen for employees. If your business relies heavily on computers, technological capacities could also be important. Some of these features can be customized to fit your needs, while others can't.

Ask about your ability to alter an existing space. If your business requires modifications to the existing space—for example, adding cubicles, raising a loading dock, or rewiring for better communications—make sure that you (or the landlord) will be able to make the necessary changes.

Fellow Tenants, Services, and Other Factors to Consider

You might want to be in a building with certain types of tenants—for example, businesses that are complementary to yours or provide a needed service. Healthcare professionals likely want to be near a hospital, pharmacy, or x-ray lab, for example. Or you might want to find a building that houses a health club, coffee shop, or a fast copy service that you, your employees, or customers will find handy.

On the other side, you might also want to stay away from buildings that contain certain types of businesses, such as those that compete with yours, or that are next to businesses that you want to avoid For example, if you run a children's dance studio, you probably won't want a bar as your next door neighbor.

Besides the other tenants, a wide range of features could be important to your choice of business space. These features could depend on the number and type of clients and customers who visit your property. For instance, if you have a lot of customers visiting your location at once, you might look for ample parking in or near the building. You should also consider or even prioritize building security. Adequate strong locks, alarm systems, and even security guards could be important if your business is open late, handles large amounts of money, or is likely to be attractive to a burglar.

In addition, you might want to consider other factors that could be important to your business, such as:

  • the image you want to project
  • visibility, and
  • signage.

For example, if your business depends on drop-in trade from pedestrians and motorists, you'll want to make sure that the space you're considering is visible from the sidewalk or street.

Negotiating Lease Terms to Fit Your Business's Needs

When you're looking for where to rent, the space itself is important. You'll want to choose somewhere that has the price, location, and features you're looking for. But you should also pay attention to what benefits you can get from the lease itself. You can negotiate terms into the lease that can benefit your business now and in the future (see below for a lease's critical terms).

Potential for expansion: If you plan on growing your business within the next year or so, you could want to rent commercial space with the potential for expansion. By thinking ahead, you can save yourself the hassle and expense of another search and move to a new space. Consider negotiating an expansion clause into your lease that will give you the right of first refusal when other space in your building opens up.

Rights and restrictions in the lease: Other, less conspicuous items spelled out in the lease might be just as crucial to your business's success. For instance, if you expect your camera repair business to depend largely on walk-in customers, be sure that your lease gives you the right to put up a sign that's visible from the street. Or, if you're counting on being the only sandwich shop inside a new commercial complex, make sure your lease prevents the landlord from leasing space to a competitor.

Critical Commercial Lease Terms

Typically, you'll be working with a lease form that's been written by the landlord or the landlord's lawyer—and you can bet that neither one of them will be looking out for your best legal or business interests. To level the playing field, you need to learn a bit about the terms of a business lease, so that the landlord's proposed lease is just the starting point from which you'll negotiate changes.

The following list includes many items that are often addressed in commercial leases. Pay attention to terms regarding:

  • the length of the lease (also called the "lease term"), when it begins, and whether there are renewal options
  • rent, including allowable increases (also called "escalations"), and how they'll be computed
  • whether the rent you pay includes insurance, property taxes, and maintenance costs (called a "gross lease"); or whether you'll be charged for these items separately (called a "net lease")
  • the security deposit and conditions for its return
  • exactly what space you're renting (including common areas such as hallways, restrooms, and elevators) and how the landlord measures the space (some measurement practices include the thickness of the walls)
  • what you can and can't do in your space, including what goods and services you can sell, and when and how you can sell them (defined in a "use clause")
  • whether there'll be improvements, modifications (called "build-outs" when new space is being finished to your specifications), or fixtures added to the space; who'll pay for them, and who'll own them after the lease ends (generally, the landlord does)
  • specifications for signs, including where you can put them
  • who'll maintain and repair the premises, including the heating and air conditioning systems
  • which insurance policies you're required to take out, such as liability or property insurance
  • whether the lease can be assigned or subleased to another tenant
  • whether there's an option to renew the lease or expand the space you're renting
  • if and how the lease can be terminated, including notice requirements, and whether there are penalties for early termination
  • whether disputes must be mediated or arbitrated as an alternative to court, and
  • what counts as defaulting under the lease and any remedies you're entitled to if the landlord doesn't live up to their obligations under the lease, and vice versa.

You'll need to reach an agreement with the landlord regarding each of these lease terms. Decide which terms are non-negotiable for you and which you can use as a bargaining chip. Above all, you need to make sure the lease will work for your business (as discussed in the previous section).

The Americans with Disabilities Act

The Americans with Disabilities Act (ADA) requires all businesses that are open to the public or that employ more than 15 people to have premises that are accessible to disabled people. Make sure that you and your landlord are in agreement about who'll pay for any needed modifications, such as adding a ramp or widening doorways to accommodate wheelchairs.

Consult a Contracts Attorney

Commercial leases can quickly become complicated and you might have various considerations when looking for and negotiating the perfect spot for your business. If you need help specifying certain conditions for your business or defining legal terms, consider talking to a contracts attorney with experience negotiating commercial leases. They'll know which terms and conditions to fight for, and they can clearly explain your responsibilities under the lease.

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