Commercial Lease Agreement Templates
A Commercial Lease Agreement is a contract used by property owners and landlords to establish the terms and conditions of an agreement in which their property is rented to a tenant who will be using the property solely for business purposes. The types of property that would be considered as commercial are wide-ranging and can include office buildings, retail spaces, industrial properties, hotels, and many others.
Commercial Lease Agreements by State
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
What is a Commercial Lease Agreement?
A commercial lease agreement is a document used to bind a landlord (lessor) and a business-owning tenant (lessee) into a three (3) to five (5) year contract in which the business-tenant will make routine monthly payments in exchange for use of the property. In comparison to the more widely-used residential leases, commercial leases are typically unprotected in the eyes of state laws, requiring parties to lean on negotiation and knowledge to ensure they are financially and legally protected during the course of the contract.
Types of Commercial Leases
Generally speaking, there are three (3) major types of commercial leases that a landlord and tenant can enter into. The lease “types” refer to how the cost of rent is determined. The types are “Gross,” “Net (includes three sub-types)” or “Modified Gross.”
1. Gross Lease
- Tenant pays a flat-fee every month (or rental term).
- Least favorable option for the landlord in most scenarios.
The gross lease puts a considerable amount of liability on the landlord. If anything were to happen to the rental, the landlord would be required to front the bill. Additionally, the tenant(s) decided to use an excess of electricity, water, heat, or other utility, the landlord would suffer through that as well. There are ways landlords can work a gross lease to their benefit, however. One example is if the landlord has plans to install waste-saving plumbing and toilets, or they plan on generating their own electricity via solar, wind, or another alternative energy. By locking the tenant into a rent that includes the cost of the current utilities at the beginning of the lease, and then making the energy-efficient additions to the property, the landlord can end up saving money that they would have previously not seen (because the tenant would be paying for utilities).
2. Net Leases
- Three (3) types of net lease: Triple Net (NNN), Double Net (NN), and Single Net (N).
- Require the tenant to pay additional costs/fees in addition to the base rent.
- ALL three types almost always require the tenant to pay for both utilities and janitorial expenses.
To understand the three (3) types of net leases, one needs to understand what each net entails. The three nets are:
- Property Taxes
- Property Insurance
- CAM charges (“Common Area Maintenance”)
Triple net leases, the most popular type of net lease, includes all three (3) of the above operating costs, requiring the tenant to pay for the property taxes, insurance, and any common area maintenance (CAM) charges (driveway maintenance, administrative fees, common area lighting, window washing, etc.). A sub-type of the triple net lease is the “absolute triple net lease,” which puts the tenant in a situation where they carry all risk for the property. If the rental was partially destroyed in a tornado, for example, the tenant would be liable for all costs associated with the repair.
Double net leases require the tenant to pay for two (2) of the nets, which are 1) property taxes, and 2) insurance.
Single net leases have the tenant pay just one (1) of the nets (in addition to utilities and janitorial expenses): the rental’s property taxes.
NOTE: Net leases commonly have the tenant pay a “pro-rata” share of the expenses they’ve agreed to pay. “Pro-rata” translates to “in equal portions,” meaning the tenant will only pay expenses equal to the amount of space they are renting in the property. For example, if a tenant is renting a 3,000 sq. ft office out of a 10,000 sq. ft building, they will only be charged thirty percent (30%) of the building’s property taxes, insurance, etc.
3. Modified Gross Lease
- The “best of both worlds” of the gross and net leases; serves as a form of compromise.
- Rent amount does not change in event utility costs go up or down.
A modified gross lease is formed by taking parts from both the gross and net lease. During negotiation, a rental amount will be set for the entire duration of the lease. This is unlike a net lease, which can fluctuate depending on the use of utilities and other operating expenses. In summary, modified leases can be edited heavily to appease both parties in the agreement; certain utility costs can be taken by the tenant (that otherwise wouldn’t) and vice-versa.
Negotiating a Commercial Lease Agreement
“…commercial leases are more complex than a purchase or sale agreement because a lease sets up a relationship—not a single event.” – Six Secrets To Commercial Lease Negotiation
Out of all the lease types available to landlords, the commercial lease, by far, is the most complex and requires the most negotiation. Historically, negotiation lies in favor of the landlord/property owner, as they are the ones that draft the initial contract. However, landlords should be prepared to face a significant amount of questions and objections if the tenant they are forming an agreement with is business savvy in the slightest. Why? Because a business’ success can be influenced heavily by the terms contained in the contract (rent amount, permissions granted to the tenant, who pays for what utilities, etc.) For landlords, the following should be kept in mind during the negotiation process:
1. The Tenant will Fight for a Shorter Lease
As any seasoned entrepreneur will know – things can change in a moment’s notice. While the average business owner expects their business to thrive (why else would they be signing a lease?), they know that by signing a longer lease, they can be in a world of financial hurt if their business fails with time left on the lease. That’s why short-term leases are typically preferred by renters. Landlords, on the other hand, should fight for a lease with a longer-term. This allows them to focus on other matters instead of needing to look for a new tenant. If the landlord finds a tenant that will not budge on wanting a shorter lease, it is almost always worth offering a decrease in the rent (within reason), taking on an additional utility, or permitting the tenant to sublease, in order to lock-in the longer term.
2. Lowering the Rent may be Beneficial
Faced with 1) locking in a tenant at a longer term, 2) agreeing to a triple net lease, or 3) or agreeing to other beneficial conditions (such as restricting subleasing), the landlord can lower the cost of rent. However, it’s important to note that this should not be done in situations where the housing market is strong and/or the rental has a lot of attention from prospective tenants.
How to Write a Commercial Lease
Step 1 – Download
Step 2 – Date & Party Identification
Enter the day, month, and year that the lease is entering into effect, followed by the full name of the landlord and tenant(s).
Step 3 – The Property
- The full address of the property
- A detailed legal description of the commercial property
Step 4 – Lease Term
- Starting date of the lease (day, month, and year)
- Ending lease date (day, month, and year)
Step 5 – Rent Payments
Enter the full yearly amount that the tenant will be required to pay, followed by the amount in monthly increments (divide it by 12). Below the values, enter the address or location where the payments are to be delivered.
Step 6 – Expenses
Check the box corresponding to the type of expenses that will be paid for by the landlord or tenant (Triple Net, Modified Gross, or Gross)
Step 7 – Damage
In the highlighted field, enter the number of days the tenant has to notify the landlord (lessor) of lease termination in the event the property is damaged by structural defects, casualty, or fire, thereby rendering the property unusable for the tenant’s purpose.
Step 8 – Default
Enter the number of days that can pass after the landlord has issued a notice before the landlord can officially terminate the lease.
Step 9 – Security Deposit
Write the dollar amount of security deposit that is due to the landlord the tenant before or during the signing of the lease.
Step 10 – Notice
In the provided spaces, enter both the landlord and tenant’s addresses in which all notices should be mailed or delivered to.
Step 11 – Brokers
- If the tenant was not shown the commercial property by a real estate broker or agent, check the first (1st) box.
- If the tenant was shown the property by a licensed realtor, check the second (2nd) box, write the name of the agent, the state of the agent’s license, and the name of the real estate agency.
Step 12 – Governing Law
Enter the name of the state in which the property is located, the laws of which will have influence over the contents of the lease contract.
Step 13 – Required Disclosures
If the lease does not already contain the state’s specific required disclosures, enter them into the lines provided.
Note: It is highly recommended that an attorney specializing in commercial leases or a licensed realtor overview the lease to ensure it contains all the necessary provisions before signatures are recorded on the contract.
Step 14 – Date of Signing
Input the date the parties are signing the commercial lease.
Step 15 – Signatures
In the fields provided, enter:
- Witness Signature and Printed Name
- Landlord Signature and Printed Name
- Tenant Signature(s) and Printed Name(s)