Important Terms to Include in Your Commercial Rental Agreement

Making a Commercial Lease for your rental property necessitates paying close attention to several important contract conditions. Find out more about safeguarding your investment here.

What you will discover:

Selecting a Lease Type
Rent and Escalation Provisions
Insurance and Indemnity for Renewal and Early Termination
Property Improvements and Maintenance

If you own a commercial property and rent it out, you have a vested interest in preserving the integrity and value of your investment. Your business rental agreement, which explains your rights and duties to your renter, is one of your most critical instruments. What you put in your lease is determined by your individual demands as well as market factors in your area. Most Commercial Lease Agreements should include the following critical terms.

Selecting a Lease Type

Non-Residential or Commercial Leases differ greatly since they are almost totally negotiated between the landlord and tenant. There are three types of business leases that are regularly utilized.

Gross Lease Modification. The landlord pays for all maintenance and operating expenditures as part of the rent under a gross lease. A modified gross lease is a frequent variant when numerous tenants share a single property, such as an office building. Typically, the renter is responsible for expenditures directly linked to their unit, such as repairs, maintenance, and cleaning. The landlord includes such expenditures for communal spaces in the rent. If common expenditures grow in the future, the tenant may be required to pay their proportionate part of the increase in addition to their rent.
Net Lease three times. The tenant pays for property taxes, building insurance, and upkeep under a triple net lease, often known as a Net-Net-Net Lease. If there are many renters, the expenditures are distributed proportionately. Separating these expenditures from the rent avoids the landlord from losing money if the expenses grow dramatically. A Triple-Net Lease may be found here.
Net Lease twice. A Double Net Lease, also known as a Net-Net Lease, requires the tenant to pay for property taxes and building insurance. The landlord retains responsible for upkeep, providing them more control over the building’s condition. The landlord is still protected from increases in property taxes and insurance.

See this Commercial Lease Agreement or Retail Space Lease for other samples of commercial rental agreements.

Rent and Escalation Provisions

Commercial leases are normally for multiple years, which helps ensure renters do not lose their company premises abruptly. This increased protection is crucial for renters, but it may be difficult for landlords when expenses climb over time. An escalation provision enables a landlord to raise the rent throughout the term of a lease to meet expense increases and to profit from rising property values.

Rent escalation provisions may raise the rent every year or after a certain number of years. The clause might be for a set cash amount, a percentage increase, or depending on an external indicator such as inflation rate.

Early Termination and Renewal

Renewal clauses provide a tenant with further assurance that they will be able to stay at a place where they have invested in their business. In exchange, a landlord would often incorporate an automatic rent increase as part of the conditions of an automatic renewal. The renewal provision may also allow for further discussions or unilateral modifications, such as who pays for certain expenditures.

An early termination provision enables a tenant to end a lease early if their company fails or the site proves to be unsuitable. The landlord will often add an early termination fee with this provision to mitigate any expenditures and missed earnings if they need to locate a new renter. A lease termination provision may also lessen the likelihood of having to go to court for a broken contract.

Indemnity and insurance

Landlords often demand renters to have business liability insurance and other related coverages. If someone is harmed on the property or a tenant causes damage to another, the tenant’s liability insurance allows the aggrieved party to recoup and minimizes the likelihood that they would sue the landlord.

A tenant is required under an indemnification provision to defend the landlord and pay lawsuits arising from the tenant’s acts. This might be added with or without a necessity for insurance. A case in point would be if a renter’s visitor slips and falls in an area maintained by the tenant but then sues the landlord.

The landlord often maintains both building coverage and a liability insurance to cover their own acts. Accidents that occur in a common area that the landlord maintains, or if a landlord’s maintenance worker injures a tenant while working in their space, may be covered by the landlord’s liability coverage.

Property Improvements and Maintenance

A business lease should also cover everything from basic maintenance to substantial additions and modifications. This depends on the landlord’s and tenant’s choices, as well as the kind of lease. A large office building with several tenants often conducts the majority of the maintenance and upkeep and does not enable tenants to make significant changes. Tenants in retail and industrial establishments are often allowed to freely design their premises and are responsible for maintenance and upkeep. It is critical to specify the services you provide, what you want the renter to perform, and what the tenant is not permitted to do.