Understanding a commercial lease

On behalf of Sam Patel of Patel & Dalrymple, PLLC on Monday, August 20, 2018. 

If you are starting a new business in Virginia or looking for a new or additional location for your existing business, you likely will need to sign a commercial lease. Most businesses start out operating in leased premises, and many, particularly those in the retail sector, never operate from anything other than leased premises.

As you already know if you have leased commercial property before, commercial leases are a completely different species than residential leases for homes or apartments. One of the main differences is that you have far more flexibility to negotiate the terms of a commercial lease than you do with a residential lease. In addition, a commercial lease usually contains fewer protections for either the lessor or the lessee. This is because contract law presumes that both parties to a commercial lease have more business acumen than residential lease parties.

Common negotiable terms

No two commercial leases are exactly alike because no two commercial lease situations are exactly alike. While the lessor may own a building in which numerous businesses lease space, each lessee brings his or her own unique needs and desires to the negotiation table. That being said, negotiable terms almost invariably include the following:

  • The amount of the rent
  • The amount of the security deposit
  • The length of the lease term
  • The events and mechanics involved with rent increases during the lease term
  • Which property improvements are the lessor’s obligation and which are the lessee’s obligation
  • Type, size and placement of signage

Common lease types

Make sure you understand which type of commercial lease your potential landlord is offering you and what obligations you are assuming by signing it. Each of the five main types of commercial leases has its own name as follows:

  1. Gross lease
  2. Net lease, also called a single net lease
  3. Modified net lease, also called a modified gross lease
  4. Double net lease, also called a net-net lease
  5. Triple net lease

Owners of multi-tenant buildings usually offer either a gross lease or modified gross lease. This means that you and your landlord likely will split building repair and maintenance costs. You may also split the building’s operating expenses such as its taxes and insurance. Since neither you nor your landlord can predict whether these costs will increase or decrease during your lease period, your rent amount may or may not be tied to such fluctuations. That could be yet another negotiation point between you and your prospective landlord.