Commercial Lease Basics
What is a commercial lease?

A commercial lease is a legally binding contract made between a landlord and a business tenant. The lease gives a tenant the right to use certain property for a business or commercial activity for a period of time in exchange for money paid to the landlord. Additionally, the lease outlines the rights and responsibilities of both the landlord and tenant during the lease term. LawDepot provides a written Commercial Lease Agreement.

What makes a commercial property lease different from a residential property lease?

A commercial lease is used by a tenant to rent space for a business while a residential lease is used by a tenant to rent a home or space to personally reside in. Commercial leases are typically viewed as contracts between knowledgeable business people. Consequently, less governmental protection is available for tenants of commercial property than tenants of residential property. Because the parties are knowledgeable business people, the underlying belief is that they should be able to negotiate the terms of the lease to their liking. Consistent with this idea, the parties of a commercial lease typically have greater bargaining power and more negotiating ability than the parties of a residential lease.

Why isn't an oral lease agreement sufficient?

The problem with oral lease agreements is that they can be difficult to enforce. If a dispute arose, a court would have to hear evidence and decide whose version of the story to accept. If there is a written agreement, courts will generally be obligated to uphold the terms of the written agreement even if the courts don't like them. Some jurisdictions require that any contract dealing with land or an interest in land must be in writing to be enforceable.

What are provisions commonly dealt with in a commercial lease?

A commercial lease typically deals with the following:

  • the type of property being let;
  • the address of the property being let;
  • the term of the tenancy and whether the tenancy is for a fixed term or renews periodically;
  • the amount of rent payable, how often and when the rent should be paid;
  • the type of business that may be conducted on the premises;
  • ownership of any leasehold improvements; and
  • the provisions of any security/damage deposit.

In addition, a commercial lease may also identify the following:

  • provisions for lease renewal;
  • landlord improvements and signing incentives;
  • tenant improvements;
  • whether the tenant can assign or sublet the property:
  • notice provisions for termination of the tenancy; and
  • insurance provisions.
What is the governing law of my lease?

The governing law is the jurisdiction where the property is located, regardless of the jurisdiction where the landlord and tenant reside.

The Parties
Who are the parties to the lease?

The parties to a lease are the lessor (also called the landlord) and the lessee (also called the tenant). The lessor owns the property and allows the lessee to use the property in exchange for monetary payments called rent.

What is a guarantor or surety?

A guarantor or surety is a person who agrees to pay any losses directly to the landlord should the tenant be unable to pay the rent, or otherwise breach the tenancy agreement.

The Leased Premises
What is the legal description of a premises?

The legal description of the premises refers to how the property is identified in real estate legal transactions. The description can be found in a deed, mortgage, or other purchase document or may be obtained from a county recorder, land titles office, tax assessor, or other similar official.

What are fixtures?

In real estate terminology, the word "fixture" refers to a piece of property that is sufficiently attached to the Premises so that to move or remove it would damage the property. If the attached part of the property can be removed without significant damage to the property then it is usually not considered a fixture. Examples of fixtures may include built in cabinets, sinks, toilets or wall-to-wall carpeting.

What are chattels?

Chattels are personal property. They are distinct from real property or real estate in that they can be moved from one location to another. Examples of chattels may include blinds or curtains, microwaves, refrigerators, desks and personal computers.

What are leasehold improvements?

A leasehold improvement is an expense incurred for the permanent improvement to the leased property. They are considered fixed assets and depreciate in value over the period of the lease.

How is the tenant allowed to use the premises?

The tenant can only use the leased property for purposes that have been approved by the Landlord. The "permitted use of premises" clause limits the tenant to only engage in certain types of business. Before allowing the tenant to use the property for additional purposes that are not stated in the Lease, the tenant needs to obtain the written consent of the Landlord.

The Lease Term
What does "Automatic Renewal" mean?

Automatic renewal means that the lease continues indefinitely on the agreed upon period (weekly, monthly, or yearly) until either the tenant or the landlord gives notice to the other party that they will be terminating the lease.

Which lease term should I use?

LawDepot allows you to choose from several different types of lease terms:

  • Fixed End Date

A lease with a fixed end date gives certainty of term for both the landlord and the tenant. It specifies the exact day the tenancy will end. The advantage here is that neither party has to give notice to terminate the lease, it simply ends on the specified date. In a fixed end date lease, the landlord cannot increase the rent, or change any other terms of the lease unless he specifically reserves the right in the lease, and the tenant agrees to the changes. If the tenant remains past the specified date the landlord can either: (a) accept rental payments and have the lease continue as a month-to-month tenancy with the same rules as the expired fixed end date lease; (b) sign a new lease; or (c) start eviction proceedings against the tenant.

  • Fixed Number of Weeks/Months/Years

A lease for a fixed number of weeks/months/years gives a start date for the lease and the number of weeks/months/years that the lease will run (for example: the lease could start on September 1, 2005 and then continue for a period of 18 months). The advantage here is that neither party has to give notice to terminate the lease, it simply ends on the specified number of weeks/months/years. In a fixed term lease, the landlord cannot increase the rent or change any other terms of the lease unless he specifically reserves the right in the lease, and the tenant agrees to the changes. At the end of the specified period, the landlord can either: (a) accept rental payments and have the lease continue as a weekly/monthly/yearly tenancy with the same rules as the expired fixed end date lease; (b) sign a new lease; or (c) start eviction proceedings against the tenant.

  • Periodic

A periodic tenancy (a weekly/monthly/yearly lease with automatic renewal) will continue until one of the parties terminates the lease. To terminate the lease, the landlord or tenant must give notice of their intention to terminate as specified by statute. A landlord can usually raise the rent, or change the terms of the lease in these types of agreements by providing proper notice as required by statute. At the end of the notice period the tenant must move out or the landlord can start eviction proceedings against the tenant.

What is "Base rent"?

Base rent refers to the minimum or base amount of rent as set out in the lease excluding percentage rents or any other additional or operating costs.

What is a "percentage lease"?

A percentage lease refers to a specific type of rental arrangement that applies mainly to retailers, especially in shopping centers or multiple-tenant malls. In a percentage lease, the tenant pays a fixed or base rent plus a percentage of gross income. To create this type of rental arrangement, have the tenant pay "Base Rent plus % of Gross Profits".

What are "FRI leases"?

An FRI lease means a full repairing and insuring lease where all costs of maintenance and repair and the cost of insurance (whether insured directly or through the Landlord) are met by the Tenant.

What is a Gross rent lease?

A Gross rent lease is a type of commercial lease where the tenant pays the base rent and any specified expenses with respect to the Premises and the landlord pays all other expenses associated with operating and maintaining the property. Operating expenses may include insurance, utilities, maintenance expenses and sometimes taxes.

Security/Damage Deposit
What is a security/damage deposit?

A security deposit is a sum of money the tenant pays to the landlord to guarantee that the tenant will fulfill all obligations under the lease. The landlord holds the security deposit for the term of the lease to ensure that the tenant does not default on the terms of the lease agreement or otherwise damage the property. Should the tenant damage the property (normal "wear and tear" excluded) or if the Tenant has not paid rent, the landlord is entitled to recoup the debt from the security deposit. Usually the tenant must provide the landlord with the security deposit at the start of the lease term. At the end of the lease term, the tenant will receive the deposit back minus any deductions for repairs/restoration.

How much should the damage/security deposit be?

Damage deposits are usually equivalent to the maximum of one month's rent, but can be any amount that the landlord decides upon in a commercial setting. Security deposits can vary from one up to three months rent depending upon the tenant and industry.

What is a schedule of condition?

The schedule of condition is an inspection report for the let property which is completed at the commencement of the lease. This form contains a description of the condition of the property at the time of the tenant's possession and may also include a portfolio of photographs as evidence of the property's condition. The schedule is used at the end of the lease term as a comparison tool to determine if the tenant caused any damage to the property. The tenant should ensure that all damage is properly disclosed in this report to prevent a landlord from assuming the tenant has caused the damage.

Landlord Improvement/Signing Incentives
What is a signing incentive?

A signing incentive is an incentive or concession given to the tenant to enter into the lease, such as a month's free rent.

What is subletting a lease?

Subletting the lease refers to when the rights to use the property (or a part of the property) under a lease, is transferred by the current tenant to a third party for a portion of the remaining term of the lease.

What is assigning a lease?

Assigning the lease refers to the complete transfer of all rights to occupy the premises for the rest of the term from the current tenant to a third party.

What additional clauses does the long version include?

Some of the additional clauses in the long version include clauses that set out the basic terms and definitions in the lease as well as clauses detailing the parties' insurance obligations and repairing obligations.

When would the tenants have to have the carpets professionally steam cleaned?

The tenants will be required to have the carpets professionally steam cleaned before the final move-out inspection occurs.

Signing Details
I do not know when the lease will be signed. Can I fill in the date later?

Yes, by selecting 'Unsure' as the date the agreement will be signed, a blank line will be inserted into the lease so that you can add the correct date after printing the document.

Who should sign the lease?

Both the landlord and the tenant should sign the lease. Having witnesses to the parties' signatures provides greater evidence that the parties entered into the lease.

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