Common Commercial Lease Terms

At this stage, you've likely found suitable commercial real estate for your business and you and the landlord have agreed on the key features of the lease. For instance, you've probably figured out how much rent you'll pay and how long the lease will run. Now it's time to formally spell out your deal in a binding, written lease.

You'll want to head into the lease negotiations with an understanding of the meaning of the landlord's lease clauses. By gaining an insight into these common commercial lease terms, you can avoid hidden, onerous traps and more successfully bargain for modifications in your favor. The list below introduces you to the most common lease clauses.

Parties

Leases generally begin by naming the landlord and the tenant, in a clause entitled "Parties." Or, the clause could be entitled "Landlord and Tenant," or "Lessor and Lessee" (the landlord is the lessor and the tenant is the lessee).

Although you might not think so at first, it's important to look at these names carefully. For example, if you're a corporation or a limited liability company (LLC), you'll want to make sure that your name on the lease is your company's legal name, such as "Able Investments, LLC," or "Macro Industries, Inc." An error in the way you or the landlord is identified can have serious repercussions.

If you're an LLC or corporation and you list your personal, not corporate, name, you could become personally responsible under the lease. And you probably chose to form a business with limited liability protection to avoid any personal liability for your business's obligations.

Premises Clause

Somewhere near the beginning of your lease, often right after the Parties clause, you'll see a clause that identifies the space that you'll be occupying. This clause is often titled "Premises."

Leasing an entire building. If you're leasing an entire building, the clause should simply give the street address (and should describe any outbuildings or lots that come with it).

Leasing part of a building. If you're leasing less than an entire building, you and the landlord need to describe the space more precisely. In particular, you should spell out whether you'll have access to storage rooms, conference rooms, parking, kitchen facilities, and the like.

The Use Clause and Exclusive Clause

A "use clause" limits how you'll use the rented space. The limitations can be as broad as what business you'll conduct there, as narrow as what specific services or products you'll offer, or as nebulous as the quality level of your operation. Landlords can impose use restrictions for any of these reasons:

• The landlord has promised other tenants that no one will compete with them.
• The landlord is worried about liability if you conduct certain kinds of business.
• The landlord has a personal aversion to certain kinds of business activities.

In general, you'll want to avoid strict restrictions on your use of the rented space. Most of the time, you'll count yourself lucky if the lease handed to you by the landlord doesn't include a use clause.

An "exclusive clause" is a promise by the landlord that only you and no one else in the mall or building can engage in a particular type of business or carry a certain type of merchandise. (Naturally, other tenants will have use clauses that prevent them from conducting business activities that would violate your "exclusive.") Typically, only powerful "anchor" tenants get exclusives.

For more detailed information, see our article on the pros and cons of the "use" and "exclusive" commercial lease clauses.

Term Clause

Near the beginning of the lease, you'll see a clause entitled "Term." This clause describes the length of your lease and specifies the start and end dates.

You might be tempted to cruise right through it—after all, if you want a five-year lease and the Term clause gives you five years, where's the complication? Alas, there's more than one tricky wrinkle, and they're apt to be hidden and dangerous.

For example, some leases start as of the date the lease is signed, even though you haven't conducted business for even a day. Though you might not be responsible for rent right away, you'll be responsible for other obligations in the lease, such as the requirement that you carry insurance.

Done properly, leases should have many "start" dates, corresponding to events such as:

• when you can enter the premises to set up
• when your rent is due
• when you become responsible for securing insurance, and
• when you can open for business.

If these dates aren't already outlined in the lease, you should add them. Make sure these dates are reasonable and achievable.

Rent

For most small businesses, the amount of the monthly rent obligation is a very important issue. Before you get to the stage of signing the lease, you've likely already agreed to a number with the landlord.

But it's important to look carefully at the landlord's lease clauses to see whether your rent estimates will pan out and to determine any new costs or savings, such as:

• expenses that you didn't anticipate—make sure you understand which parts of the landlord's operating costs will be passed on to you
• savings that could make it possible to shoulder other expenses—for example, the landlord might offer a "tenant improvement allowance," which you'll use to get the space ready for your operations, or
• issues that you want to renegotiate, such as the landlord's expectation that the rent will increase by a certain amount on a stated date.

If you have a net lease or neighbors, make sure you understand upfront your share of property taxes, insurance, and maintenance costs.

Security Deposits

Your landlord might ask for a security deposit to assure that cash will be available if you fail to pay the rent or don't make other payments required under the lease. Unlike residential landlords, who in many states might not ask for more than two months' rent as a deposit, commercial landlords can demand whatever amount they think they need as a cushion to cover rent and other tenant financial obligations.

Or, instead of a security deposit, your landlord could ask for a letter of credit from your bank. With a letter of credit, your bank puts aside an agreed-upon amount of your funds for use by the landlord should you not carry out your financial obligations.

Improvements and Alterations Clause

If your new space will have to be customized to fit your needs, a big chunk of your lease should address this issue. You and the landlord will have to reach an agreement about the following issues related to your improvements and alterations:

• who does the design
• who does the work
• when it gets done, and
• who pays for it.

If you're going to occupy space in a building not yet completed, you'll want to be sure that you pay for as little of the construction work as possible. This clause should address the work that you want or need to do to the space at the start and down the line.

Maintenance, Utilities, and Code Compliance

The landlord's lease will undoubtedly contain a Maintenance clause that concerns your duties to care for your own rented space (or for the entire building, if you're the sole tenant).

If you're a tenant in a multi-tenant building, you and the landlord will also have to settle on how the utilities will be billed and paid for. So you'll often see a Utilities clause near the Maintenance clause in the lease.

Finally, the landlord might expect you to keep the building "up to code." This term usually isn't clear or well-defined in the lease. You'll typically see this language in a lease clause titled "Compliance" or "Compliance with Laws."

Parking, Signs, Landlord's Entry, and Security

You're likely to find several clauses in the lease that concern practical understandings you have with your landlord, about such things as parking and business signs and when the landlord can enter your rental space. As you negotiate these clauses, you and the landlord will be trying to smoothly integrate your needs to run your businesses wisely. Although these clauses might not pack the punch of a Rent or Maintenance clause, they can be very important to a successful and convenient tenancy.

Insurance Clauses

Several kinds of insurance are available to cover the risks of leasing commercial space, including:

• property and casualty insurance
• commercial general liability insurance
• rental interruption insurance (this covers you if your business is unexpectedly interrupted, as would happen after a natural disaster), and
• leasehold insurance (this coverage protects you if your lease is canceled due to circumstances beyond your control and you have to rent elsewhere at a higher rent).

You'll need to evaluate each type of insurance coverage in the context of your lease and your landlord's requirements, your business needs, and the property—and negotiate accordingly. An insurance broker can help too, especially when it comes to choosing adequate levels of coverage.