A commercial lease agreement is used to bind long-term property rental for a store, office space, or area for business use. In this type of lease, a tenant is usually registered as a company and may use the property’s address for business purposes. This commonly entails indicating the address in government registrations, marketing materials, or as an event venue. A lease for commercial property typically lasts for a few years depending on the lease term and rental fee. Because of this long-term engagement, the agreement usually contains:
Depending on the company’s industry, both landlord and tenant may also have to revise some details of the lease agreement. However, it is always best to begin with a legally-verified agreement template before revising. If you’re looking for more guidelines, the rest of this comprehensive article can help you.
A commercial lease is distinctly different from a residential lease in terms of the following:
According to the law, the labels “residential” and “commercial” are determined by the intended use. If the tenant seeks to use the property’s address privately as a home, then a residential lease agreement will do. However, a landlord and tenant must write a commercial lease agreement if the said property will be used publicly for business. When registering the address in government papers, one must make sure that their lease agreement is for a commercial lease.
Properties used for commercial purposes have different types. Depending on the nature of the business, they may give more weight to the existing floor plan or on the location. Therefore, it would be a good idea for landlords to familiarize themselves with the following:
Commercial properties for office use are categorized based on location and presentation of the property being rented. For instance, companies may prefer buildings rather than residential types, because this would affect their credibility. While bigger companies may opt to rent entire buildings (also called “office park”), some medium-sized companies would tend to lease a few floors. In this case, the landlord must have an administrative team to handle any concerns.
Retail properties are not dependent on size. They prioritize foot traffic and location above anything else. Properties along major roads or inside of a strip mall may be considered as commercial leases. Oftentimes, shops would rent these to gain more walk-in customers. In contrast, a bigger retail property would come in the form of malls and shopping centers. These would attract more foot traffic and therefore require a higher sum for their base rent.
For manufacturing businesses that have many employees and have complex operations, a property with a huge area is a priority. Often, these would be located outside of the city and hire employees from nearby communities. The major advantage of renting a big property in rural areas are (1) lower wages, (2) bigger area, and (3) cheaper rent per square meter. However, landlords must check if their prospective tenants have complete licenses for manufacturing and environmental protection as this will greatly impact their community and the value of their property in the long run.
Oftentimes, businesses just lease properties rather than owning them. The type of property greatly affects what type of company it will attract. With this in mind, it is important for landlords to highlight the features of their properties, which can become advantageous for the business.
1. Gross Lease
In this type of lease, the tenant is only responsible for the base rent while the landlord pays for other expenses like utilities, insurance coverage, and property taxes. When computing the fixed base rent, the landlord may include the estimated electric and water consumption of the company plus real estate taxes. This is a good way for the company to regulate budget and unload their employees of other burdens.
2. Net Lease or Triple Net (NNN) Lease
In this type of commercial lease, the tenant is responsible for paying all expenses on top of the fixed base rent. This would include all utility bills, real estate taxes, and property insurance. On top of this, the tenant will also be responsible for regular area maintenance and repair for property damage. An NNN lease is the exact opposite of a gross lease.
Once the payment terms have been determined, the type of commercial lease is further broken down into area or set-up, which is discussed below:
3. Garage Rental Agreement
Most companies have vehicles but have nowhere to house them. In the case of this lease agreement, a tenant will only pay for a garage area or lot where they can park their vehicles. This type of commercial property lease is common to logistics or travel companies.
4. Facility Event Space Rental Agreement
For entertainment or marketing-related industries, event facilities are commonly rented for fixed schedules. This ensures that they will not be bumped off the calendar for their future events, which are crucial to their business.
5. Booth (Salon) Rental Agreement
In some retail businesses, only a simple booth (salon) is required. Normally, this would not take up much space, so these tenants will pay the landlord for a small portion of a shared area where they can set up their booth. Sometimes, these booths become part of a sublease agreement (a second-degree type of rental. See: “According to Set-up”).
6. Financial Lease or Capital Lease
On top of a gross lease or net lease, an agreement can be considered a “Financial” or “Capital” lease if the landlord acts as the financer of the business property or equipment. The tenant company is then responsible for paying the financer without buying or transferring ownership. This works if the value of the equipment or property will lessen over time and the company does not want to deal with other costs or headaches.
7. Operating Lease
An operating lease runs shorter than a financial or capital lease. It allows property use for a short but fixed period of time. In this way, a residual value is retained, allowing the landlord to still charge a fairly high amount to the next tenant or renter.
8. Conveyance Type Lease
Like a rent-to-own setup, a conveyance lease is long-term and aims to transfer the title to the tenant once the final payment has been made. Oftentimes, this becomes a mutually beneficial setup to a landlord who cannot find buyers and a tenant who is willing to buy but lacks initial funding.
9. Leveraged and Non-Leveraged Lease
Since most properties exceed the financial capability of growing businesses, a co-owner shares the cost of the mortgage. In this commercial lease set-up, both become the tenants and the landlords of the property. This works best for sister companies or businesses with related industries, who can maintain good relations with each other.
10. Tax-Oriented Lease or True Lease
This type of lease qualifies for some government tax benefit, therefore benefiting both landlord and tenant. Here, the landlord and tenant can file tax-cuts through a legal process. They will then be notified by a representative if the property qualifies or not.
11. Sales Aid Lease
The payment for the property or asset is directly related to the sales performance of the company. In this case, the landlord may choose to participate in the business as the marketing arm. This partnership can become mutually beneficial if the landlord has the time and capacity to take on a new role.
12. Specialized Service Lease
Businesses may also rent an asset (e.g. special equipment or construction vehicles). Since this would require a specialist to operate the said asset, the lessor or owner can add the cost of hiring to the rental fee. This may apply to Facility or Event Space commercial agreements where audio or lighting equipment usually comes as part of the package.
13. Cross-Border Lease
Commonly used by industries under logistics or international e-commerce, this lease involves a landlord and tenant from different countries. Aside from a detailed commercial lease agreement, the tenant will be required to submit government permits.
14. Sale and Leaseback
In some cases, sales and leaseback can happen when the tenant sells their asset to the lessor or landlord. Then, they would pay a rental fee for using it. This is useful if the company needs a large sum of money to finance its business activities and the lessor is willing to provide such (allowing them to earn more over time).
15. Import Lease
An import lease is a type of rental for a piece of imported equipment. The owner would be from another country, so the lessee or renter would then send the payment abroad.
16. Sublease Agreements
As previously mentioned in the Booth (Salon) agreement, the direct tenant of an area may have the right to rent out a smaller area. He or she then finds third-party tenants who would like to set up their booth or small office. In this case, they would often pay to the direct tenant instead of the landlord.
Commercial leases may be more complicated than a residential property. In order to navigate through complex details, here are time-tested steps that you can follow:
Step 1 – Check similar properties.
To determine how to best position your commercial property, you may compare it with other similar properties in your area. Since a prospective tenant would also be doing the same depth of research, it will be to your advantage if you balance out different factors including the following:
Step 2 – Take measurements and list details.
The floor space is one of the first pieces of information you must give prospective tenants. The following will need to be determined:
However, most of them will not know how to visualize the measurements of each space. So, after the numerical details are written, you may answer the following questions:
Step 3 – Determine the price per square feet ($/sqft.)
Since similar properties won’t have the same space, you may determine your real estate property’s price by referring to the average ($/sqft.) of your competitors. Take their information and adjust yours depending on your property’s advantages and other factors such as property tax and cost of an insurance policy. You may refer to the formula in the next section.
Step 4– Determine whether your lease type is a Gross Property Lease or a Triple Net Lease (NNN).
Along with the price, you must declare whether the price already includes all other expenses (gross lease) or it won’t (NNN). Different lease agreement templates are also available on FormsPal. (See Types of Commercial Leases).
Step 5 – Take pictures
Whether it’s for documentation or for marketing purposes, taking pictures of your property is essential before you rent it out. Aside from showing the pre-rental condition, high-quality electronic pictures can help you get ahead of the competition or hasten the process should you desire to hire an agent. One technique is to remove furniture or trade fixtures to open up space. Commercial renters prefer to begin with a blank slate so they can plan a setup that would be beneficial for their business operations.
Step 6– Hire a real estate agent or advertise on online platforms
For landlords without experience leasing commercial properties, it is often a good decision to hire a real estate agent who will find good companies and take care of the negotiation process. However, a landlord with a business mindset has the capacity to handle this on his or her own provided that he or she has time.
To begin posting on online renting platforms, make sure that the platform accommodates commercial leasing. Otherwise, you might not get the right inquiries. When posting descriptions, highlight your property’s features as discussed in Steps 1 to 2. Couple this with high-quality photos that will showcase each area in an honest manner. You may also opt to show “before and after” photos with a blank area and how it would look like as an office or a shop.
Once a company shortlists your real estate property, be prepared to attend meetings. Making short visual presentation will increase your professionalism and make your property stand out. Since most companies would like to deal with professional landlords, treating the lease agreement as a business deal will assure the prospective tenant that you offer a stable, long-term engagement.
Step 7 – Schedule a viewing
If the company decides to move forward with the leasing process, you may schedule a viewing with them and tour them around the house. This will also be a good avenue to discuss how the real estate property can accommodate their desire floorplan.
Step 8 – Do a background check
Companies looking to rent will not always have complete papers. Oftentimes, their registration will depend on the real estate property’s address. This is especially common for starting companies. In this case, you may do a full background check on the business owner(s) by checking the following:
Step 9 – Revising and Finalizing the commercial lease agreement
Discuss the details of the lease with your future tenant. You may begin with a standard gross lease agreement template and integrate revisions to accommodate their special business needs. This may include special provisions for:
Once you have finalized all of the details, you may seek legal advice to check for any inaccuracies or loopholes, which may become problematic in the long run. Since this type of lease agreement can last for years, it is crucial to finalize your agreement with full confidence. To aid you in your lease agreement, here is a standard gross lease agreement.
Step 10 – Properly receive payments and deposits.
Upon contract signing, secure the following:
It is important for the tenant that you issue an official receipt or sign a receiving form stating the amount, date, and specifics of the payment.
Step 11 – Turn over the real estate property
Once the tenant’s representative verifies the completeness of the keys and real estate documents, you may need to do another walkthrough to avoid electrical and plumbing concerns in the future. For instance, make sure that the main electrical panel or box is properly labeled. For plumbing, it will also be crucial to mention if the drainage uses a straight tube, which has to be replaced by a p-trap to avoid odors. In a nutshell, turning over the property to the tenant involves managing their expectations even with the slightest detail.
competitor’s rent quotation ($) / competitor’s total floor space (sqft.) = competitor’s price per square feet ($/sqft.)
(Competitor 1’s $/sqft. + Competitor 2’s $/sqft. + Competitor 3’s $/sqft.)/3 = Average $/sqft. in your area
(Average $/sqft.) + or – (your adjustment) = adjusted price per square feet ($/sqft.)
adjusted price per square feet ($/sqft.) x your property’s total square feet (sqft.) = total monthly rent for your property
When finalizing the commercial lease agreement (see step 9), your tenant may or may not agree with some provisions. Don’t worry, negotiation is always part of a balanced agreement and it’s always best to work with your tenant. Here are the common components where negotiation occurs:
If the tenant’s requests are within reason, it is best for the landlord to adjust. Not only will a balanced commercial lease agreement provide a bright outlook, but it will also help both parties openly communicate with each other.
Commercial properties must be handicap-friendly (e.g. have ramps for wheelchairs) if:
Who is responsible for this? Though it will be the tenant who will regulate the use of the facility, landlords bear the most responsibility according to law.
This clause automatically makes the tenant agree that they will follow all laws and zoning ordinances when disposing of hazardous or toxic wastes. This is not limited to industries that regularly dispose of vats of oil or chemicals. It could also be applicable to small dental clinics, hair salons, and restaurants. Should the landlord or tenant disregard this code, the insurance company may forfeit the coverage.
To ease the burden of writing your own commercial lease agreement, you may download this free commercial lease agreement template and start editing through the following steps:
Step 1 – Choose your program and download
Download the file type that is compatible with your computer’s existing programs:
Step 2 – Fill out the opening declaration
An opening declaration states the complete details of the landlord, tenant, and information about the lease. It is the first paragraph of the commercial lease agreement.
To fill it out, input the following in sequence for each blank in the first paragraph:
Step 3 – Describe the real estate property or area being rented
In the second paragraph or SECTION 1, input the following:
Step 4 – Indicate the lease term previously agreed upon
In the third paragraph or SECTION 2, input the following:
Step 4 – Indicate the duration of the lease
In the fourth paragraph or SECTION 3, input the following:
Still under Section 3: Rent, you will need to determine how much you’ll be adding to the rent after a year or so. For letter C, you may choose from the following:
It is important to note that while the CPI fluctuations are based on well-researched data and give a reasonable basis of adjustments, computing this may be taxing to the landlord.
Moving past the CPI percentage, the third and fourth paragraphs of this provision will be dependent on the landlord’s computation of penalties.
Step 5– Choose your terms for the security deposit.
Under Section 3A: Security Deposit, pick the box that works for you:
Step 6– Describe the purpose of the lease.
In section 4, write the following:
Step 7– Review other sections.
The sections below are standard and usually preferred by many:
However, should both parties agree on revising these provisions, they must seek legal advice. Otherwise, sections five to eight typically go untouched on lease agreement templates.
Step 8 – Agree which changes to the property must be made before the tenant moves in.
Section 9 above explains which alterations are allowed. Now, depending on the tenant’s decision, he or she may accept “as in condition” as written in selection point E. In some cases, the property may need repair. If this is applicable, you may tick the second box and describe the type of improvement that needs to be done.
Step 9– State conditions for subletting.
In section 10, the conditions for subletting are detailed. The landlord may decide to:
Step 10 – Indicate how you will want to pay for utilities and other incidental fees.
Section 11 has three options for utility payment, which are explained as follows:
Step 11 – Read through the other standard sections.
Sections 12 to 16 have been written to balance out the responsibilities between the landlord and the tenant. You may read through them in the document provided:
Step 12 – Decide on the guidelines for the property’s facade.
In the decision point H, you may choose to:
Step 13 – Check the following provisions:
The sections above provide legal bases and discuss what happens in a “breach of contract.” Other standard provisions are also detailed in favor of the landlord.
Step 14 – Indicate addresses for correspondence.
Step 15– Make no changes to other sections
The above sections are standard and help bind the entire agreement together. However, feel free to review the details discussed in FormsPal’s lease agreement templates.
Step 16 – Indicate whether or not there is a separate list of lease terms.
Step 17– Give more details about the broker.
For decision point J, you may simply:
Step 18– Choose what happens when the lease contract ends.
The landlord and the tenant can also write a new agreement once the old one has expired.
Step 19– Indicate the complete details of both parties.
Finally, wrap it up by writing the following details:
Step 20– Print and Review
Once done, print the document on a clean, legal-sized bond paper. Send it to the Tenant for review.
Step 21– Finalize and Sign
Upon finalizing the agreement, it is best if both sign it face-to-face with other witnesses. The tenant and the landlord must sign at the bottom of each page. Witnesses may also put their signature.
Step 22– Notarize
Finally, you may send this to a notary public or an attorney for documentation. By doing so, you automatically seal the agreement and provide legal enforceability.
Writing a lease agreement can be daunting, but with FormsPal’s lease agreement templates and in-depth guide will help you carry out this task with no problem.