Understanding Commercial Leases: Key Terms Every Business Should Know (Part 1)
- amy5864
- Jun 3
- 4 min read
Updated: 2 days ago
Finding the right commercial space for your business is just the beginning. Before you can open your doors, there's an important step that comes next: negotiating the lease.
A commercial lease is a legally binding contract, which is why understanding commercial leases and key terms are essential to understand what you're committing to. Once it's signed, both the landlord and tenant are bound by its terms.
What Is a Commercial Lease?
A commercial lease outlines the terms under which a landlord rents space to a tenant for business use. While most landlords begin with a standard lease, the final agreement is often shaped through discussion and negotiation. It typically reflects the tenant's business needs, such as space requirements, location, market conditions, and intended use, as well as the landlord's goals for the property.
Every landlord approaches leasing a little differently: some are flexible and open to customizing terms, while others prefer a more structured process. Understanding these differences early can help set realistic expectations and lead to a smoother leasing experience.
Understanding Commercial Leases: Key Terms Broken Down:
Use
This Clause defines how you're allowed to use the space (retail, food service, office, etc.). If your business model changes or you plan to sublease, the Use Clause becomes especially important.
It's essential to have your intended use clearly outlined in the lease and to adhere to what is agreed upon. Changing your use without the landlord's approval can be a lease violation and may lead to legal or financial consequences. It can also create issues if your new use conflicts with other tenants in the building, for example if it introduces direct competition or violates exclusivity rights granted to another tenant.
Rent & Other Expenses
Base Rent: This is the core rent amount for the space itself, typically calculated based on square footage on a monthly or annual basis. For example, 1,000 SF at $2.00/SF/month equals $2,000/month.
Many tenants new to commercial leasing assume this is the only rent they'll pay, but there are usually additional rent charges beyond the base rent. These are standard in commercial leases and can significantly impact your monthly costs.
Percentage Rent: Most commonly used in retail and restaurant leases, this means that the tenant pays their base rent plus a percentage of gross sales once those sales exceed a certain threshold. It allows rent to scale with business performance and gives the landlord a vested interest in the tenant's success.
Additional Rent: This refers to all charges beyond the Base Rent, including items such as Common Area Maintenance (CAM), and other operating costs. These may be bundled or itemized depending on the lease.
Rent Increases: Most commercial leases include built-in rent increases over the term of the lease. These may be expressed as a fixed dollar amount, a percentage increase each year (e.g., 3% annually), or tied to an index such as the Consumer Price Index (CPI). Understanding how and when your rent will increase helps you budget for the future and avoid surprises.
Free Rent
Free rent, also known as rent abatement, is an incentive offered by some landlords, typically at the beginning of a lease. During this period, the tenant is not required to pay base rent for a specified duration. This incentive is often used to help cover moving or build-out costs, or to attract tenants to spaces that have been vacant for an extended period.
It's important to clarify what is included in this offer. While the base rent may be waived, you may still be responsible for additional costs, such as common area maintenance (CAM) charges, utilities, or insurance, during the abatement period.
Common Area Maintenance (CAM): CAM charges represent the tenant's share of maintaining shared spaces and building systems, including landscaping, parking lot upkeep, exterior lighting, janitorial services, trash removal, pest control, and other related expenses. CAM is typically prorated based on the tenant's square footage and may be reconciled annually.
Property Taxes & Insurance: Tenants often pay a prorated share of the property taxes and building insurance. These may be included in CAM/Additional Rent or broken out separately.
Utilities: Responsibility varies. In some leases, the tenant is responsible for paying directly for electricity, water, internet, and trash. In others, utilities may be covered by the landlord and billed back proportionally or shared, depending on the setup. Ensure your lease outlines who is responsible for what.
Term & Renewal
The lease term is the fixed duration of time that a tenant is legally allowed to occupy the commercial space under the conditions outlined in the lease agreement. It typically spans a set number of years, commonly 1, 3, or 5, and defines the start and end dates of the lease.
Options to Renew: These allow tenants to extend the lease after the initial term ends, often at a pre-negotiated rate or with set increases. Be sure to know the notice period required to exercise your renewal option if one exists in the lease.
Stay tuned for Part 2, where we cover tenant improvements, capital expenditures, maintenance responsibilities, subleases, and more.
