Understanding Commercial Leases (Part 2): Key Terms Every Business Should Know

The fine print in your lease can work in your favor or pose significant challenges, so it's worth understanding commercial leases in detail. In Part 1, we covered key terms like rent structures, CAM charges, lease duration, and renewal options. In Part 2, we address the physical space itself, including who handles improvements and repairs, as well as how to address subletting or assignment.

Tenant Improvements (TI)

Tenant Improvements refer to modifications or buildouts made to a space to meet the specific needs of your business. These can include flooring, lighting, plumbing, partition walls, cabinetry, or specialized electrical systems.

Who pays for what?

Tenant-Financed Improvements: The tenant covers the full cost of improvements. This is common when the landlord delivers the space in "as-is" condition.

TI Allowance: The landlord provides a budget to offset improvement costs, typically expressed as a dollar amount per square foot.

Buildout: The landlord delivers the space fully built out to a mutually agreed-upon specification. This is more common in competitive markets or for leases with longer terms.

Ensure the lease clearly defines the scope, cost, and timeline of any improvements, including who will manage the work and how issues or delays will be addressed.

Maintenance & Repairs

Maintenance and repair responsibilities vary depending on the lease structure and the type of property. In most multi-tenant commercial leases, responsibilities are generally divided as follows.

Landlord responsibilities often include:

• Roof, structure, and exterior walls

• Common areas (hallways, lobbies, shared restrooms)

• Parking lots and exterior lighting

• Landscaping and grounds maintenance

• Waste management (if provided)

Tenant responsibilities often include:

• Interior fixtures and finishes

• Plumbing and electrical systems within the leased space

• HVAC maintenance

  
  

Some leases require tenants to maintain service contracts, such as quarterly HVAC inspections. Always review the lease closely to understand who is responsible for what, especially in shared buildings with standard systems.

Note: These are general guidelines. In single-tenant buildings, tenants are often responsible for all maintenance and repairs, including the roof, structure, and exterior areas.

Capital Expenditures (CapEx)

Capital Expenditures refer to large-scale improvements or replacements made to the property, such as a new roof, major plumbing upgrades, or resurfacing the parking lot.

In most cases, the landlord is responsible for capital expenditures (CapEx). However, some leases, especially NNN (Triple Net) structures, pass along a portion of these costs to tenants. It's important to understand how these expenses are allocated and whether your lease includes a cap on those costs or an amortization schedule to spread them out over time.

Assignment & Subleasing

Sometimes, you need to exit a lease before the term is up. This is where Assignment and Sublease clauses come into play.

Assignment: You transfer the lease entirely to another party. They assume all your obligations.

Sublease: You lease all or part of the space to another tenant, but you remain responsible to the landlord.

Most leases require the landlord's written consent before you can assign or sublet, and they may charge a fee for review or processing. Some leases include the right for the landlord to terminate the lease instead of allowing a transfer, known as a recapture clause.

Personal Guarantees

Sometimes landlords require a personal guarantee, meaning you, as an individual, agree to be personally liable for the lease. This protects the landlord in the event that the business defaults or dissolves.

Lease Terms Vary, Know What You're Signing

Commercial leases are complex agreements that can significantly impact your business operations and bottom line. Knowing the language of leasing and what each term means helps protect your investment and opens the door to better deals.

Please note that the terms discussed here are general in nature and that every lease is unique. Always read your lease in full, ask questions, and seek professional guidance to ensure you understand your obligations before signing.

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