How to Assess a Commercial Lease Agreement

Examining a Commercial Rental Agreement is a time-consuming procedure. Find out how to safeguard your company here.

What you will discover:

How is the monthly leasing fee determined?
What does the landlord cover, and what do I have to pay?
What exactly is a “escalation clause” and how may it effect my monthly rent?
Is a personal guarantee required for the lease?
What are my choices for renewal?
Can I sublet a portion of my property to someone else?
Can I purchase the house I am renting?

Once you have discovered the ideal site for your company, it is important to negotiate a favorable lease. Aside from pricing, there are numerous other considerations in commercial leases, and the rent itself may not be set. You may need to know what services the landlord offers, your renewal choices, escalation clauses, and how to break the lease if necessary. Continue reading to understand how to examine a Commercial Rental Agreement so you can sign with confidence.

How is the monthly leasing fee determined?

It is critical to understand how the monthly rental sum is computed when looking at a business rental ad or a contract. Unlike residential contracts, which usually invariably include a monthly price, business landlords may publish the rent in a variety of ways:

Rent is paid on a monthly basis. Smaller facilities, such as offices utilized by one individual or a small team, often cost about $500 per month.
Rent is paid annually. Some contracts or ads reflect the whole year dollar amount of rent. In most circumstances, you pay 1/12 of the yearly rent in monthly installments. A total yearly rent of $6,000 comes out to $500 per month in payments.
Per square foot (yearly). Annual rent per square foot is often used in leases and classifieds. For example, $12 per square foot for a 1,000-square-foot unit is $12,000 in annual rent. The yearly rent is still commonly split into equal monthly installments, so you pay $1,000 each month.
Monthly (per square foot). Rent may also be expressed in terms of a monthly cost per square foot. The monthly rent is $1 per square foot if the yearly rent is $12 per square foot.
Percentage. A percentage lease bases rent on sales revenue. If your rent is 5% of your yearly sales and you have $1,000,000 in annual sales, you pay $50,000 in rent. Some percentage leases feature a set rental sum, such as one of the choices listed above. In a Retail Space Lease, percentage terms are usual.
Percentage of the total. This system charges rent as a proportion of sales over a specified threshold. For example, 5% of revenues in excess of $500,000. This indicates that the starting point for sales is $500,000. So, if you make $600,000 in sales, you pay 5% of the $100,000 over the basic rent, or $5,000. In addition to the % above base, these leases sometimes demand a predetermined sum of rent.

Reviewing samples of a conventional Commercial Lease Agreement and various Non-Residential and Commercial Leases might be beneficial.

What does the landlord cover, and what do I have to pay?

A Commercial Lease is more than simply calculating the rent. Other charges to consider include electricity, taxes, maintenance, garbage pickup, gardening, window cleaning, parking lot repairs, and other expenses.

There are three primary forms of business leases, some of which carry the following additional costs:

The landlord is liable for taxes, maintenance, and running expenditures under a gross lease or full-service lease.
A modified gross lease begins as a gross lease but allows the landlord to pass on increasing operational expenditures to the tenant.
In a net lease, the tenant is responsible for part or all of the expenditures, such as taxes, maintenance, and operations. The lease specifies what the renter must pay for. A Triple Net Lease, for example, may force you to pay taxes, insurance, and maintenance costs.

What exactly is a “escalation clause” and how may it effect my monthly rent?

In a multi-year contract, an escalation provision specifies how rent may rise each year. Escalation clauses come in three varieties:

Annual cash amount fixed.
Fixed percentage every year, usually based on the previous year’s rent rather than the beginning year’s rent.
Inflation-based, which means the rent rises in accordance with the Consumer Price Index or another measure of inflation.

Remember that if your lease requires you to pay expenditures, such expenses may climb regardless of any escalation provision. If you are concerned about rising expenditures, you and your landlord may be able to agree on spending limits.

Is a personal guarantee required for the lease?

Some commercial landlords need a personal guarantee from the owner, particularly if the company has sufficient revenue, credit, or rental history. This implies that the company owner, not the corporation or LLC, may be personally liable for unpaid rent or other lease violations.

What are my choices for renewal?

When it comes to deciding the period of the lease, there are often two hazards. If your company does not proceed as expected, an overly lengthy lease might cost you additional money. If you cannot agree on new conditions with your landlord when your lease expires, you may be forced to close your doors.

Renewal alternatives may assist to mitigate these risks. A lease renewal option allows a renter to automatically extend their lease. Without this option, the lease will end according to its original terms. The option conditions should state whether the rent will remain the same, increase by a particular amount, or alter depending on market variables that will be stated ahead of time. Similarly, the option may specify whether or not additional lease conditions may change and whether or not the modifications are limited.

Can I sublet a portion of my property to someone else?

If you have more space than you need or wish to relocate before your lease expires, you might think about a Commercial Sublease. Your lease agreement with your landlord may specify that a subtenant must fulfill particular criteria or be authorized by the landlord.

Can I purchase the house I am renting?

If you want to remain in a property indefinitely, a Commercial Real Estate Lease with Option to Purchase may be a smart option for you. You should explore this option with your landlord before your current lease expires.