We assist commercial landlords and tenants with every stage of the leasing process. Whether you're considering the lease terms for a new business or a move, reviewing a letter of intent, negotiating a lease, or resolving disputes, our team provides the legal insight needed to secure more favorable outcomes – and protect your legal and economic interests. Below is a guide to some of the major considerations in commercial leasing to help you better understand some of the issues we assist with.
Commercial leasing involves the rental of property for business purposes, such as office space, retail stores, or warehouses. Commercial leases are far more complex than residential leases, with terms tailored to the specific business operations involved.
Properly structured leases align the interests of landlords and tenants as much as possible, setting clear expectations and establishing reasonable terms. Unlike residential leases, commercial agreements often focus heavily on business needs, operational flexibility, and financial obligations, making specialized negotiation and drafting essential to a successful lessor-lessee relationship.
Tenant Improvement Allowances. The use and purpose of the leased space is the primary difference between commercial and residential leases. Commercial leases are intended for business operations, such as retail or office use, while residential leases serve as living spaces. This distinction affects both the structure of the lease and the regulatory environment surrounding it. Consumer protections vary significantly between the two. Residential leases benefit from statutory protections, such as habitability requirements and oversight by housing authorities. In contrast, commercial leases generally offer fewer built-in protections, assuming both parties are sophisticated enough – after all, both are businesses – to negotiate the necessary terms for their interests. A new business owner looking for their first commercial lease is unlikely to have the same level of sophistication as a landlord who owns millions or even billions of dollars of commercial space, but the law treats them as being equally sophisticated. This means that the commercial tenant may, if he or she is not cautious, agree to terms that are draconian or costly over the long term. The length and flexibility of these leases also differ. Commercial leases tend to have longer terms, often spanning five to twenty years, with renewal options negotiated upfront. Residential leases are usually shorter, with many lasting one or two years and renewing automatically or with minimal negotiation. Commercial leases have no standard form, which is why review and negotiation of them is vital. Commercial leases may require that only a certain type of business be allowed to operated in the leased space, may contain provisions for when the landlord may move the lessee to a different space (such as to make room for a larger tenant), or may even require that the lessee-owner of the business provide a personal guaranty as to payment of the rent no matter what happens to the business, putting his or her own assets on the line if something goes wrong with the business.
Types of Commercial Leases. There are many types of commercial leases, and there is no magic formula for what constitutes one type or the other. Therefore, the lease types may be combined or modified, so it is important for any commercial tenant to understand in advance what expenses of his or her own – and, potentially, of the landlord’s – that must be paid. A triple net lease, or NNN lease, is common in retail and industrial leases. In this arrangement, the tenant covers property taxes, insurance, and maintenance costs, along with base rent. This structure gives landlords a stable income by passing operational costs to the tenant. The rent is typically broken down into multiple parts, the “base rent” (a set amount), the Common Area Maintenance (“CAM,” or common expenses all tenants are paying pro rata), and expenses like property tax and insurance. Typically, the landlord will send a notice to the tenant every year to inform of the new amount of the tenant’s portion of these other expenses. Tenants are occasionally surprised when a landlord has a large expense that gets passed back to the tenants. A gross lease offers a different structure, with the tenant paying a single, fixed rent while the landlord covers operating expenses such as maintenance, insurance, and property taxes. Gross leases are frequently used in office buildings where shared costs are pooled and managed by the landlord. A modified gross lease combines aspects of both gross and net leases. In this format, tenants cover specific operating costs, like utilities, while the landlord assumes other responsibilities. This balance offers flexibility for both parties and is often negotiated to fit the specific needs of the tenant and the property. A percentage lease requires the tenant to pay a base rent plus a percentage of their sales revenue. This type of lease is typically used in retail environments, where landlords can share in the tenant's success. The percentage structure also incentivizes landlords to attract tenants with high business potential.
The Importance of Reviewing the Letter of Intent (LOI). A letter of intent (LOI) outlines the preliminary terms of a lease before the formal agreement is drafted. Although non-binding, the LOI sets the stage for key aspects such as rent, lease duration, renewal options, and responsibilities for operating expenses. Having an attorney review the LOI early in the process can help identify ambiguities or unfavorable terms, preventing misunderstandings later. An LOI that accurately reflects the parties' intentions reduces the risk of friction during final lease negotiations. Occasionally clients will come to us after the LOI has already been negotiated. Although changes to the lease terms may still be possible, it is far better to involve an attorney early in the process, because if certain terms, like waiver of personal guarantees or TIA, are to be improved in the tenant’s favor, this is best done before the LOI is signed.
Challenges When Entering Into a Commercial Lease. Commercial leases often involve complex negotiations with multiple terms that require careful attention. Inaccurate or poorly drafted clauses can lead to disputes down the road, particularly concerning operating expenses or termination conditions. It is crucial to understand the full financial impact of the lease, including hidden costs such as maintenance fees or utility surcharges, to avoid unpleasant surprises. Another challenge is the limited flexibility many commercial leases provide. Long-term commitments are common, and breaking a lease early can result in significant penalties unless a termination clause is negotiated upfront. Compliance with zoning laws and use restrictions is also essential. Failure to ensure the property is suitable for the intended business use can result in operational delays or legal issues.
Key Considerations for Commercial Tenants. Understanding how rent increases are calculated is critical for commercial tenants. Many leases include escalation clauses that raise rent annually based on fixed percentages or economic indices. Securing predictable rent increases helps businesses plan for the future and manage cash flow effectively. Tenants must also be aware of their maintenance obligations, particularly in net lease arrangements. If the lease requires the tenant to cover major repairs, such as HVAC or roof maintenance, these unexpected costs can disrupt business operations and cash flow. Lease agreements may also contain use restrictions that limit the type of business activities allowed on the premises. Tenants need to ensure the lease aligns with their business model and complies with local zoning laws to avoid operational disruptions. Flexibility in assigning or subletting the lease is another consideration. Businesses may need to pivot or downsize, and having the ability to assign or sublease the space offers a critical safety net. Tenants should also explore the possibility of negotiating exclusive use clauses, which prevent competitors from leasing nearby spaces and protect the tenant’s market share within the same building or complex.
Key Considerations for Commercial Landlords. Landlords need to assess a prospective tenant's financial health to minimize the risk of default. Reviewing financial statements, credit reports, and business plans offers insight into the tenant’s ability to meet their lease obligations. Landlords can mitigate risks by requesting security deposits or personal guarantees. Landlords must also decide how to allocate maintenance responsibilities and capital improvements. Defining who is responsible for major repairs—such as structural upgrades—protects the landlord’s investment while clarifying tenant expectations. It is essential to ensure that the tenant's intended use complies with zoning laws and other restrictions. Failure to address these issues may expose the landlord to fines or even force tenants to relocate. Landlords must also carefully draft Common Area Maintenance (CAM) clauses to avoid disputes with tenants over operating expenses. A well-structured CAM agreement ensures that tenants share fairly in the property’s operational costs.
Using Commercial Lease Negotiations to Secure Favorable Terms. Every commercial lease is different, and what is a problem in one may be drafted completely differently in another. That said, there are a number of common issues that come up in commercial lease negotiations: •Rent escalation clauses ensure predictable rent increases over time. This may involve setting caps on annual rent increases, or tying increases to economic indicators like the Consumer Price Index. Predictable rent escalation helps businesses manage long-term expenses. •Rent-free periods at the beginning of a lease are common to request, and help to offset other startup costs. Tenants may negotiate “free” rent at the beginning of the lease to cover moving expenses or secure allowances for space customization. •Early termination options or buyout clauses give tenants flexibility. These provisions allow tenants to exit the lease early if business needs change – or unexpected challenges arise. No business is guaranteed, and these clauses act as a sort of insurance policy against worst-case scenarios. •Ensuring that the landlord is responsible for capital improvements can also protect tenants from unexpected expenses. Negotiating this responsibility allows tenants to focus their time and money on business operations without worrying about costly repairs to major infrastructure in the building. •Exclusive use and non-compete clauses protect tenants against competitors from occupying spaces in the same location. These are especially important for retail establishments. After all, if you are a tenant opening an independent coffee shop, the last thing you want is for the landlord to allow a Starbucks to rent the space next door to you. Though you cannot protect against market conditions, you can protect your market position within a the property. •Flexible lease-assignment and subletting rights provide tenants with another safety net. Most leases, by default, do not permit tenants to sublet to other businesses, or to assign the lease to anyone else without the landlord’s permission. Although may landlords may still resist allowing a lease to be freely assignable, some revisions to a commercial lease may decrease the assignor-lessee’s costs and require the landlord to act reasonably in the event of a proposed assignment.
The Importance of Attorneys in Commercial Leasing. Commercial leases are highly customized agreements, and even small oversights can lead to significant financial consequences. A large commercial landlord often has teams of attorneys constantly reviewing and updating their leases to make them ironclad. Whether you are a landlord who wants to make their lease even stronger, or a tenant who wants to build in flexibility, working with an experienced commercial leasing attorney ensures that the lease’s terms align with your business goals and protect your interests. And, if disputes arise, attorneys play a critical role in resolving conflicts efficiently and minimizing potential losses.
