Commercial Lease Agreements: AKA Read the Lease!

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So, you have a business, and you need a place to run it. You need a lease agreement. The most important thing is to READ THE LEASE. It amazes me how many business owners just sign! Remember that you can negotiate lease provisions. The lease will always be written in favor of the landlord, so pay attention, or you may be paying in court later.
A commercial lease agreement is a legally binding contract executed between a landlord and a tenant (typically a business owner) for the purpose of renting property for retail, office, or industrial use. The designation of “commercial” means that the property will be used strictly for business purposes, and annual rent is based on price per square foot ($/SF) plus any operating expenses. Any business owners choose to rent property rather than purchase property because it requires less capital. Commercial leases tend to be more complicated than residential leases, and there are certain terms that a landlord and tenant should be sure are included in the agreement. Common lease lengths are between 5-10 years, with options to renew at pre-set rates. Now is where you remember that you can negotiate.
Commercial lease agreements are usually negotiable and need to fit the needs of the tenant’s business. Each lease will vary depending on the landlord and tenant’s requirements, but most commercial leases will include the following common terms.

1. Cost of Rent

The monthly rent amount is usually the biggest concern for both landlord and tenants. The business lease agreement should clearly state the agreed-upon monthly rent, the due date for rent, and what utilities, taxes, and insurance the tenant is responsible for.

2. Length of Lease

The length of the lease can vary depending on the needs of the business and landlord. Landlords generally prefer longer leases to ensure consistent payment, while a new business may feel safer with a shorter lease. Many leases start out with a term of one year with an option to renew.

3. Security Deposit:

It is common for a landlord to require a security deposit due at the signing of a commercial lease. The lease should include information about the amount and return procedures of the deposit.

4. Property Description

The property that is to be rented needs to be clearly and  accurately described in the lease. It should include information like the property address,size of the space, common areas, and parking availability.

5. Rent Changes or Increases

Usually, commercial leases will include terms regarding annual percentage-based rent increase. This can normally be negotiated between the tenant and landlord.

6. Business Signs

A business owner will need to have signage on the property to promote their business. It is important that the lease doesn’t prohibit signs on the property and gives details about what kind of signs and what size signs are allowed.

7. Improvements or Repairs to the  Property

Another common term in commercial lease agreements addresses whether improvements or modifications can be made to the property. This clause will include who is responsible for payment of improvements and whether the tenant needs to return the property to the original condition at the end of the lease.


Many businesses request the option to sublet the commercial space to a third party. This is because even if the business fails, the tenant will still be responsible for the commercial lease agreement. All terms relating to subletting the property should be laid out in the lease agreement.

9. Use  Clause

A use clause is included in a commercial lease agreement to dictate the kind of activity that the tenant can engage in on the property. This protects the  property and  the  landlord from damages and liability. A tenant is going to want a broad usage clause to allow different kinds of activity on the premises.

10. Exclusivity Clause

A exclusivity clause is very important for a tenant to have included in a commercial lease if the rental property is in a complex with multiple units. This prevents a landlord from renting additional units to the business’s competition.

11. Common Area Maintenance (CAM)

CAM is the upkeep of a shared area within a given property occupied by multiple tenants. Please be aware that some leases include CAM costs that allow an extra assessment at the end of the year for large maintenance costs such as roof repair and parking lot resurfacing. Read your lease and negotiate terms such as end-of-the-year assessments.

12. Personal Guaranty

With businesses such as marital arts, there may be few assets from which the landlord can collect from a defaulting tenant. As such, most commercial leases in the service industry will require a personal guarantee of the lease. It is important to understand the payment obligations on a personal guaranty. This is not just your business assets; these are your life assets.

Generally, responsibilities for commercial property landlords are dependent on the type of lease terms they negotiate with their tenants. Below is a list of general responsibilities to consider:

  • Checking property specs. The landlord will need to check and validate that the property can be used commercially for the activities that may be conducted by tenants. This may involve checking building codes and requirements for specific types of businesses.
  • Decides how  tenant uses  the  property. The landlord will need to decide how they want tenants to use their property and may have certain obligations. For example, if a business rents from a tenant, the landlord may not be allowed to rent property to a competitor.
  • Setting lease  terms. The landlord will need to create lease terms they offer to tenants. Terms will need to address the length of leases, who is paying for operating expenses, pricing, renewals, security deposits, and more. These terms should all be reflected in the commercial lease provided to a tenant.
  • Tax obligations. The landlord will need to make sure property taxes are being paid. Taxes may be paid directly from the landlord or be the tenant’s responsibility, depending on the type of commercial lease put in place.
  • Improvements & Repairs. The landlord may be responsible for making improvements to the building should certain tenants require them. They will also need to address repairs unless the lease terms they put in place makes it the tenants’ responsibility.

The key takeaways when looking at a lease is to read it, negotiate it, and understand it. Do not just sign because you are happy to have a business.

The  information contained in  this  article is  provided for informational purposes only  and  should not  be  construed as  legal  advice on  any  subject matter. You should not act or refrain from acting on the basis of any content included in this article without seeking legal or other professional advice.


Written by:  Laurie Hunter Peterson
Laurie is Senior Counsel for a large real estate development firm in Little Rock, Arkansas, with primary practice in corporate law and business transactions.  She is also a 6th degree black belt Master Instructor.
Laurie Hunter Peterson