What should companies look for in commercial leases?

On Behalf of | Jan 2, 2024 | Commercial Real Estate & Environmental Compliance |

A commercial lease can be a cost-effective solution for a business that needs space. The organization can obtain a commercial facility or retail space without the challenges involved in purchasing real property. Commercial leases are an excellent option for startups and also for expanding companies trying out new markets.

Finding an affordable space or a property in the perfect location could benefit a business. At the same time, a commercial lease is a massive financial responsibility that could persist even if the company becomes insolvent or ceases operating. Therefore, business owners, executives and entrepreneurs typically need to be very careful when signing a new lease.

What factors should people review most carefully when evaluating the terms of a commercial lease?

The lease’s duration

One of the most significant differences between a commercial lease and a residential lease is that a commercial lease is valid for multiple years. The average commercial lease creates financial obligations that last for anywhere from two to five years, although some commercial leases could last for a decade or even longer. Some landlords may be open to negotiating more flexible terms about the least duration if the tenant is a startup or a company expanding into new markets.

Maintenance costs and responsibilities

Landlords have several ways to address maintenance issues. Frequently, they pass those expenses on to tenants. A business occupying a single shop in a strip mall would likely have to pay common area maintenance (CAM) fees to help cover parking lot maintenance and security expenses. Someone renting a standalone facility might have a triple net lease where the landlord passes certain maintenance expenses to them. Other times, leases may include terms that make tenants responsible for maintenance rather than maintenance costs. Then, if there are issues with the facilities, the commercial tenant may have to cover the costs for repairs or maintenance.

Lease assignment and termination expectations

Landlords sometimes include terms in their leases that prohibit tenants from assigning the lease to another party. Doing so might prevent a tenant from finding a mutually beneficial solution when they need to end their tenancy before the lease ends. Other times, landlords may include very different terms, like force majeure clauses, that allow them or the tenant to end the lease early in certain, uncontrollable circumstances. Tenants can sometimes negotiate to remove or include special clauses about early lease termination or at lease assignment.

These terms can have a major financial impact on a business. Negotiating for the right terms can make a big difference for companies acquiring rented commercial space.