What Do I Look for in a Commercial Lease?

Commercial leases are not the same as residential leases. In residential leases, the law specifies a number of responsibilities for the landlord. Commercial leases do not have the same legal requirements. Understanding the differences and the specific terms in a commercial lease is crucial for businesses looking to secure the right space for their operations.

Commercial Leases vs. Residential Leases

Commercial leases and residential leases differ in several fundamental ways. One basic difference is that commercial leases are typically longer in duration, often ranging from 3 to 10 years, whereas residential leases are generally shorter, typically 1 year or less. Additionally, commercial leases tend to be more complex, with a greater emphasis on the specific needs and requirements of the business tenant. Rent calculations, maintenance responsibilities, and termination clauses are just a few of the areas where commercial leases diverge from their residential counterparts.

Full-Service Leases vs. NNN (Triple Net) Leases

Another important distinction in commercial leases is the difference between full-service and NNN (triple net) leases. In a full-service lease, the landlord covers the costs of utilities, property taxes, and building maintenance, with the rent reflecting these additional expenses. Conversely, in an NNN lease, the tenant pays a pro-rata share of these costs, in addition to the base rent (often referred to as Common Area Maintenance or “CAM”). The choice between a full-service and NNN lease can have significant financial implications for a business. Full-service leases provide more predictability and stability in terms of monthly expenses but may come with a higher base rent. NNN leases offer the potential for lower base rent but require the tenant to manage and budget for additional operating expenses. One word of caution when entering an NNN lease is to know how much the CAM can fluctuate; if there is no limit on CAM increases, it can harm a small business that cannot absorb the unexpected increase.

Common Clauses to Watch Out For

Commercial leases are often laden with complex clauses that can have far-reaching consequences for tenants as they are typically written by the landlord and favor the landlord. Some of the most critical clauses to be aware of include:

1. Rent Escalation Provisions: These clauses outline how the rent will increase over the course of the lease, often tied to factors like inflation or market rates. Carefully review these provisions to ensure they align with your business's financial projections.
2. Maintenance and Repair Responsibilities: Clearly define who is responsible for maintaining and repairing the leased premises, as well as the associated costs. This includes how quickly an issue must be remedied and what constitutes a ‘remedy.’ Poorly drafted clauses can lead to disputes and unexpected expenses.
3. Termination and Renewal Options: Understand the terms and conditions for terminating the lease or renewing it at the end of the term. Ensure that these clauses provide your business with the flexibility it needs.
4. No Cap on CAM: The CAM fee is designed to have some flexibility to allow the landlord to recover the additional cost of upkeep. This is understandable; however, it leaves a small business vulnerable because of the variability. Negotiating a cap to a CAM increase is one way to provide more stability to a small business’s financial picture.
5. Subletting and Assignment Restrictions: Many commercial leases place limitations on a tenant's ability to sublet the space or assign the lease to another party; others may impose a fee to allow assignment. Negotiate these clauses carefully to preserve your business's options.
6. Indemnification and Liability Provisions: Review the lease's indemnification and liability clauses to understand the extent of your business's exposure to potential risks and liabilities.

Conclusion

Commercial leases are complex and can vary greatly from one landlord to another. It is extremely important for commercial tenants to not take anything for granted. By carefully reviewing common clauses and negotiating favourable terms, you can ensure that your commercial lease aligns with your business's needs and protects your interests in the long run.

‍