MAKE YOUR FREE Commercial Lease

A Commercial Lease is a legally binding agreement between a landlord and a tenant that outlines the terms and conditions of renting a commercial property. Writing a Commercial Lease requires careful consideration of various clauses to protect the rights and interests of both parties involved. Let’s explore some of the essential clauses and terms that are often included in a commercial lease to ensure a smooth and mutually beneficial tenancy.

Security Deposit

A security deposit is an amount of money the tenant gives to the landlord that can be used to offset unpaid rental payments or some other default by the tenant. Most states do not limit the amount that can be collected as a security deposit when the lease is for commercial purposes (i.e., renting space to a printing business as compared to renting an apartment to the president of the printing business for his private living quarters). However, some states require that the security deposit be retained in a separate account, perhaps bearing interest. Check with an attorney if you have any questions about the collection of a security deposit.

Commercial Lease Payments

In Commercial Leases, there is usually no restriction on the amount of rent charged. These leases are generally unaffected by rent control laws. However, state and local laws can change quickly based on local considerations and unanticipated situations. Check with a lawyer if you have questions about legal restrictions on local rental rates.

Late Payments

Many states have laws limiting the amount of fees that can be charged for late rental payments, but they generally apply to residential, rather than commercial leases. For commercial leases, the landlord generally is allowed to charge whatever late charge that the parties agree upon, as long as that amount is reasonable in relation to the amount of rent and how long the payment has been overdue.

Automatic Renewal/Holdover

Commercial leases often provide for automatic renewal of the lease at the end of each term unless either party gives written termination notice to the other party. Most renewal clauses provide that the terms of the renewed lease will be the same as the old lease except that the lease payments may be adjusted.   

A Commercial Lease Agreement can also include a "holdover" clause, which automatically characterizes the lease as a month-to-month lease after the term expires but before the tenant leaves. This characterization defines and limits the relationship so that the landlord can enforce its terms.

Maintenance

It is important to clearly indicate who is responsible for each maintenance item. Generally, the tenant is responsible for most maintenance items in a Commercial Lease Agreement, except perhaps for the roof, exterior, and structural components of the building. 

It is important to check county and city ordinances for specific duties that may be imposed on landlords. A lawyer should be consulted if you have questions.

Remodeling and Improvements

It is important for the landlord to retain control over any remodeling or alterations to the property. If the tenant redesigns the property in a manner that is impractical or unattractive to other potential tenants, it may be difficult to re-rent the property when the tenant moves out. Therefore, if remodeling or improvements will be permitted at all, the lease may require pre-approval by the landlord. Further, the tenant may be required to restore the property to its original condition before leaving.   

Also, allowing a tenant to make improvements to the property can result in "liens" against the property. For example, if a tenant hires a contractor to install a new furnace and then fails to pay the contractor, most states authorize the contractor to file a "mechanic's lien" or "contractor's lien" against the property. A "lien" is similar to a mortgage in that the lien holder (here, the contractor) can force the sale of the property, if necessary, in order to get paid.  

Therefore, if the tenant will be allowed to make improvements, the landlord may want to take appropriate steps to make sure that the contractor is paid in full. In some states, some protection can be obtained by including language in the lease which prohibits liens caused by the tenant and then filing the lease with the appropriate government office. Contact an attorney for further assistance. 

Casualty Insurance

Either party can be assigned the responsibility to obtain and pay for casualty insurance on the property and its contents. In a lease where the tenant occupies only part of the space in the building, it is common for the landlord to insure the building and the tenant to insure his or her belongings (if desired). If the tenant occupies an entire building, however, the tenant may be required to maintain the insurance coverage at levels specified by the landlord and to name the landlord as an "additional insured." In any event, where the tenant must supply the insurance, the landlord should be provided with proof of insurance and a commitment from the insurance company to notify the landlord prior to any lapse of coverage. 

Non-Compete Clause

A non-compete clause is used to ensure that no other tenant operating the same or similar type of business can lease space in the same building. This clause benefits certain service-oriented businesses that do not want competition within the same commercial property. For example, if the tenant opens a pizza shop on the property, the landlord would not be allowed to lease another space on the property to another pizza shop because it would cause direct competition with the tenant.

Sublet

A "sublet" or "sublease" is a lease by a tenant (also known as a “lessee”) to a third party of all or a part of the property that the tenant is leasing from a landlord (also known as the “lessor”). Under the sublease, the original tenant becomes the "sublessor" and the new tenant is referred to as the "sublessee." The sublease does not release the tenant from the remaining obligations of the lease, unless the landlord specifically releases such obligations in writing.  

Obviously, the landlord will insist on retaining some control over the selection of any sublessee in order to prevent a complete stranger from occupying the property. Therefore, it is recommended that you include a lease provision that prohibits subletting the property without the landlord's prior written approval. This gives the landlord the opportunity to screen and approve the prospective sublessee.

Subordination of Lease

A "subordination of lease" is a consent from the tenants that their rights to enjoy possession of the property are lower ("subordinate") in priority than the rights of a bank holding a mortgage on the leased property. The landlord's bank usually requires this arrangement for the bank's protection. Without it, the bank might be limited in enforcing its mortgage (upon the landlord's default) because of the tenant's superior right of possession. 

Termination on Sale

A "termination on sale" provision gives the landlord the right to prematurely terminate the lease if the leased property is sold to a third party. The new buyer may want to occupy the property itself or lease the property to a different tenant. Therefore, without this provision, the property would be less valuable to the buyer because the tenant could not be forced to leave.

General Provisions

A lease should include provisions that: (i) make it clear that the document contains the entire agreement of the parties, (ii) require any changes to the agreement to be in writing and signed by both parties, (iii) preserve the remainder of the agreement if one of its provisions is invalid, and (iv) specify which state's laws will govern any dispute between the parties.