Renting a commercial space is a big decision. And the terms of your commercial lease can determine the success or failure of your business. So, before you approach a landlord, it’s best to learn the basics of commercial leasing to help you navigate this subject.
This article shares essential facts a business owner should know.
Further Reading: Leasing for professional reasons? Find out how much it costs to rent a commercial property in Sydney.
Commercial Lease: What Is It?
A commercial lease is a contract between a landlord and a tenant, giving the tenant legal rights to a retail space or property. It outlines the terms and conditions that both parties must follow. A commercial tenant can be anyone from a sole proprietor of a small business to a giant multinational corporation.
Meanwhile, commercial property is any space, land, or building used for business purposes and functions. A commercial real estate broker like Independent Commercial Real Estate can work on behalf of a property owner, a business owner, or both to negotiate the terms of a commercial lease.
Commercial Versus Residential Leases: 4 Key Differences
It’s essential to understand that, legally and practically speaking, a commercial lease differs from a residential one. This section enumerates critical distinctions between them. Here are some of them:
1. No Standard Forms
Most commercial leases don’t have any standard agreement or form. Instead, every commercial lease is based on the landlord’s needs. Some commercial leases offer protection to tenants, but most are often written to favour the landlord. This lack of standardisation means you should review your commercial lease carefully before signing.
2. Limited Consumer Protection Laws
Generally, a commercial lease is not subject to most consumer protection laws that govern a residential lease. For instance, a commercial lease doesn’t guarantee tenants’ privacy like residential leases. In addition, there’s no limit to the amount charged for a commercial lease’s security deposit.
3. Flexibility And Negotiability
A commercial lease involves more negotiations than a residential lease. A more prolonged negotiation is typical since businesses usually need special features to include in their spaces. Most commercial landlords are eager to win commercial tenants and are willing to be flexible and extend special offers.
4. Legally Binding
A commercial lease is more binding than a residential lease, making them harder to break. Hence, it can be challenging to change the terms and conditions. Since commercial leases are considered legal contracts, much money is at stake if provisions are broken or not followed.
4 Types Of Commercial Leases
Generally, there are multiple types of commercial leases available. By understanding the different types of leases, you’ll be better informed when negotiating the lease cost. Here are the four types of commercial leases:
1. Full-Service Leases
Also known as a gross lease, a full-service lease means you’ll only pay the standard rate for rent and utilities. With this type, some landlords don’t include extra costs, resulting in a higher rental fee. These include insurance, real estate taxes, and maintenance fees.
With a full-service lease, you’ll only receive a single bill covering all the necessary office expenses, making it convenient for tenants. However, some full-service leases still require tenants to pay a portion of the operational costs.
To avoid this, it’s best to thoroughly and carefully examine the lease. You can also seek legal opinion to determine if additional fees are stipulated in the lease agreement. A full-service lease is typical in the retail industry since numerous tenants occupy a single property.
2. Net Lease
Under a net lease arrangement, the tenant pays a portion of the building’s operating costs. These include the common area’s maintenance fees, insurance, and real estate taxes. A net lease is classified into three categories:
- Single (N Lease): In a single net lease, you may pay the utilities, rent, and property taxes. Meanwhile, the landlord shoulders the cost of insurance and maintenance.
- Double (NN Lease): Aside from rent, you’ll pay for the insurance, taxes, and utilities under this lease arrangement. However, the lessor pays for the structural maintenance costs. If it’s an office building with multiple tenants, the landlord will divide the insurance and real estate tax costs among tenants.
- Triple (NNN Lease): A triple net lease is the opposite of a gross lease since the tenant pays the rent and all the operating costs of the building. Hence, you’ll have a lower rent but higher variable costs. A triple net lease is often available longer-term and has concessions for rent increases written into the agreement.
These are the different categories under a net lease arrangement.
3. Absolute NNN Lease
Some people use triple net lease and absolute NNN lease interchangeably. However, they aren’t the same. In a triple-net lease, the lessee must pay a portion of all the building’s repair expenses. However, the landlord will still assist with those expenses. Under the absolute NNN lease, the landlord is released from all responsibility for the property’s expenses.
4. Percentage Lease
Percentage leases are more common for retail mall outlets. Under this agreement, you must pay a standard rent and a percentage of your gross sales for a percentage lease. Generally, a landlord may request 7%, but some will ask for 10% to 12%. With this commercial leasing, you can pay a lower rental fee since you’ll be paying a portion of your sales.
What Is Included In A Commercial Lease Agreement?
A commercial lease agreement outlines the responsibilities and rights of the landlord and the tenant. This includes the following details:
- Names and specific personal details
- The property’s address and basic information
- Commercial building type
- Square footage
- Lease length
- Terms of renewing the lease
- Security deposit
- Cost and deadline of rent
- Appliances and fixtures provided in the property
The following information is included in a commercial lease agreement. It also contains an outline of what you can do on the leased space, including renovations.
Takeaway
Whether moving into an office space, opening a store, or renting out a production facility, every business needs a commercial space to function. However, finding a suitable commercial lease can be challenging. If you’re considering renting out a commercial space, this guide has armed you with the knowledge to navigate the complicated world of commercial real estate.
