Guide to Commercial Lease Agreements
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What Is a Commercial Lease Agreement?
How Does a Commercial Lease Differ From a Residential Lease?
Contractual agreement Both commercial and residential leases are legally binding contracts between the landlord (lessor) and the tenant (lessee). Rent payments In both cases, tenants are required to make regular rental payments to the landlord as specified in the lease agreement. Obligations and responsibilities Both types of leases outline the rights and responsibilities of both the landlord and the tenant, including maintenance obligations, adherence to rules and regulations, and adherence to the terms of the lease.
Longer and more binding Unlike residential leases, which typically last one year, commercial leases can last for several years. A commercial lease also tends to be harder to break than a residential lease. No standard form Commercial leases typically aren’t based on a standard form or agreement but are customized to the landlord's needs. As a result, it’s a good idea to carefully examine every commercial lease agreement offered to you. Fewer legal protections Commercial lessors and lessees have less legal protection than residential ones because state and consumer laws typically only apply to residential leases. With a commercial lease, the tenant generally has no rights other than what is explicitly stated in the lease agreement. More complex Commercial leases tend to be more complex compared to residential leases due to the unique considerations involved in commercial properties, such as zoning regulations, maintenance of common areas, and additional provisions related to business operations. Tenants may be responsible for property taxes Renters in a residential lease agreement are usually not responsible for paying property taxes, whereas with commercial lease agreements, it's very common for the tenant to pay at least a portion of the property taxes.
7 Types of Commercial Leases
1. Net Lease
2. Single Net Lease
3. Double Net Lease
4. Triple Net Lease
5. Absolute NNN Lease
6. Gross Lease
7. Percentage Lease
What to Look For in Your Commercial Lease
Duration of the lease Businesses often have multi-year commitments as opposed to just one year. Make sure you understand how long you are agreeing to rent the property. Space you are renting What is the exact space that you are renting? Does it include common areas such as hallways, rest rooms, and elevators? Penalties What are the penalties for paying the rent late? How long do you have before you accrue any fines? Rent amount Is the rent amount what was discussed between you and the landlord? If it’s more, don’t be afraid to ask why. Also don’t be afraid to negotiate, even at this stage of the game. Negotiating commercial leases is common and often takes place until just before the contract is signed. What happens at the end of the lease term Does the lease expire after the term length passes, or will you have an option to go month-to-month or renew it for shorter periods of time? Utilities Who is responsible for paying the monthly utility bills, such as gas, electricity, and water? Depending on the type of lease you have, you may be responsible for everything, nothing, or only a portion of the cost of utilities. Building maintenance Are you responsible for lawn care, snow removal, or the overall maintenance of the parking lot and building? If you are being allocated a percentage of maintenance fees based on the percentage of the building you're renting, be sure the percentage is based upon the overall size of the building and that it doesn't vary based on how much of the building is rented out at any point in time. Specifications for signs Can you hang signs and, if so, where? Insurance Who is in charge of insuring the building? Many types of leases make it the tenant’s job to insure the building’s structure. It may be outlined in the lease that the landlord expects you to get commercial property insurance. Alterations to the space Are you allowed to make any changes or modifications to the building or space you are leasing? If you are, what is expected of you after your lease ends? Security deposit The security deposit is paid by the tenant to the property owner when signing the contract. The lease agreement should specify the amount that was paid in regards to the security deposit and the terms for its repayment. Taxes Are you expected to pay property taxes on the building? If so, are you expected to pay the entire amount or a percentage? Personal guarantee Typically, a landlord won't sign unless you personally guarantee the lease. However, you may be able to negotiate the nature of the guarantee. Maybe you can provide a guarantee for only a portion of the lease term or arrange that the guarantee only last for six to 12 months after you terminate the lease. Rent increases Generally, rent for commercial property increases by a predefined percentage each year. However, you might be able to negotiate a longer time between increases. Subleasing Are you allowed to sublease? A sublessee is another business that works in your lease space under your lease terms. You pay the lease and the other party pays you a portion of the cost. Many landlords don't allow sublessees, but you may want to negotiate this if you think you might want to take on a sublessee at some future point in time.
Common Terms in Your Lease, Explained
5 Steps to Getting a Commercial Lease
1. Determine Your Requirements
2. Research Potential Spaces
3. Visit and Evaluate Properties
4. Negotiate Lease Terms
5. Review and Sign the Lease Agreement
How Does Your Loan Factor Into Your Lease?
3 Small Business Loan Tips
Online lenders generally offer fast application reviews and quick access to cash. Conveniently, you can find recommended small business loans by using Lantern by SoFi. If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit. Traditionally, lenders like to see a business that’s at least two years old when considering a small business loan.
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